Circuit City May Become Ghost Town

The same credit problems that have hit many a home mortgage holder are also threatening to unplug troubled electronics big-box store Circuit City (NYSE: CC). The nation's second-largest seller of consumer electronics said Monday it will close 155 stores, lay off up to 17 percent of its 43,000-employee U.S. workforce, and consider all options to restructure its business.

"Since late September, unprecedented events have occurred in the financial and consumer markets causing macroeconomic trends to worsen sharply," said James A. Marcum, acting president and chief executive officer of Circuit City. "The weakened environment has resulted in a slowdown of consumer spending, further impacting our business as well as the business of our vendors. The combination of these trends has strained severely our working capital and liquidity, and so we are making a number of difficult, but necessary, decisions to address the company's financial situation as quickly as possible."

Cash Poor

Circuit City's vendors were starting to clamp down on hikes in credit lines, just as the company was preparing for the all-important holiday selling season. The Richmond, Va.-based company is also unable to collect US$80 million in income tax refunds it says it is owed by the government, limiting the company's cash to pay for filling its inventory with high-definition televisions, digital cameras, video game consoles and other consumer electronics.

The stores being shut down -- which generated $1.4 billion in net sales for fiscal 2008 -- will probably not re-open on Tuesday, the company said. The stores are in 55 markets; Circuit City will exit 12 of them. Ten other locations expecting stores will not get them. The company will also attempt to renegotiate existing rental leases.

Just last week, Circuit City was informed that it was in danger of being delisted by the New York Stock Exchange because its stock price had traded under a dollar for a month.

Incomplete Holiday Picture

Two analysts give differing takes on what the Circuit City news means for the consumer electronic industry, which until recently had been considered relatively immune from the economic downturn.

Circuit City was struggling before the economy began to nosedive, Stephen Baker, vice president of industry analysis for NPD Group, told the E-Commerce Times. So Baker believes the company is not necessarily a canary in the coal mine for consumer electronics.

"Is it going to be tough? Sure, but we tend to have products that fit into the times we're in," Baker said, "where people may want to stay home. We're selling more communal products -- those are the ones doing best. The largest screen televisions are doing better than smaller screens. We're selling notebook computers, which let people do multiple things as opposed to one thing. It's not recession proof, but I think it's better than other retail segments. I think the electronics market will hold up better."

"I would bet that things are going to be pretty grim for the fourth quarter," Kurt Scherf, vice president and principal analyst for Parks Associates, told the E-Commerce Times. "If you were going to buy a consumer electronics product, you probably already made that play, in large respect because of tax rebates, or the release of the new iPhone. I just almost wonder if any of the demand that may have been generated for the fourth quarter has all but evaporated, which says to me that a company which doesn't have cash in the bank is going to be struggling."

Opportunities for Competitors

The top electronics retailer, Best Buy (NYSE: BBY), could certainly pick up Circuit City customers who may be losing a store in their neighborhood. Wal-Mart (NYSE: WMT) may also dig into both Best Buy and Circuit City turf by offering installation and support service for its consumer electronics items, Scherf said. Best Buy's Geek Squad and Circuit City's Firedog tech installation/support services "that used to be significant differentiators are no longer so," Scherf said.

Retailers hoping to take advantage of Circuit City's woes will have to adjust to consumer demand for more price-point value and less technology, Baker believes. "They're just looking for more specific solutions at very specific prices, and the holiday is going to exacerbate that. Instead of buying a $1,400 flat panel HDTV, they may be looking at the $1,200 one or the $1,100 one. They may have less bells and whistles, but in these times they're not going to buy the top of the line."

In the meantime, with some analysts predicting a bankruptcy filing in Circuit City's immediate future, Scherf believes a long-standing "rule of two" in the consumer electronics business may be ripe for the breaking. "You always like two strong players for whatever you're talking about -- set-top boxes, telecommunications equipment vendors, whatever. Should Circuit go away, who does that leave other than Best Buy and, I suppose, Wal-Mart? We've seen Magnolia get integrated with Best Buy and Tweeter disappear. We're starting to lose big box retailers, and I wonder what that means."