In Startling Demise, Circuit City to Liquidate Its 567 Stores

U.S. Bankruptcy Court Judge Kevin Huennekens, Richmond, Va., Friday approved a bid from a liquidator group that includes Great American Group, Hudson Capital Partners, SB Capital Group and Tiger Capital Group to begin selling off $2 billion in inventory starting Jan. 17. Circuit City warned Jan. 5 that it faced liquidation if it couldn’t find a buyer. The liquidators were cleared to hire store employees and give them retention bonuses of up to 10 percent. The companies also will be able to sell home theater and 12-volt installation services up to 10 days before a store closes.

Several other potential bidders -- Mexican businessman Ricardo Salinas Pliego and Golden Gate Capital -- were interested in the chain, but Circuit City’s $2.3 billion debt, coupled with an uncertain future even under a new owner, forced creditors to push for liquidation, analysts said.

“Even if you made it a small company and did all the right things, you would still have that big debt burden,” said Andrew Abrams, an analyst at Avian Securities. “That would just eat up everything they could make. You would end up with a declining asset with an increasing percentage of debt no matter what happens. The creditors were just a little stronger than Circuit thought they would be.”

Circuit City’s liquidation marks a startling fall for a retailer that in the mid-1990s had the upper hand on Best Buy, which at the time was struggling financially and had violated covenants on its loan agreements. But Best Buy retrenched, hired Anderson Consulting, and reemerged as a stronger chain. Meanwhile, Circuit City used its cash to venture into used cars with CarMax and buy a majority share in the Digital Video Express conditional-access DVD venture, which the chain called Divx for short. It spun off CarMax and later closed down Divx, but Circuit City critics have argued those forays marked the beginning of the end for the chain because they took management’s eye off the ball. In the years leading up to its filing for bankruptcy in November, Circuit City dropped major appliances, fired 3,400 of its highest paid sales associates, acquired the InterTAN chain in Canada and struggled to revamp an aging point-of- sale software system.

“In 1996, everybody thought Best Buy was done and Circuit City had won, but Best Buy dodged that bullet and 13 years later look where we are,” said David Workman, executive director of the PRO Buying Group, who was a senior executive at Ultimate Electronics at the time. “Circuit sort of took their focus off the core business that gave them the money to go play with CarMax, Divx and other things. Then it was ill- timed decisions related to appliances and they didn’t pay themselves back when they divested CarMax.”

The likely beneficiary of Circuit City’s liquidation will be Best Buy, which as a result could see a 7 percent benefit in same-store sales in the fiscal year ending February 2010, said Jack Murphy, an analyst at William Blair & Co. Regional chains also stand to gain as they face one less competitor, dealers said. In the Atlanta market, BrandsMart’s two stores have posted increased revenue since Circuit City closed there last fall, President Michael Perlman said. No regional CE chains are likely to emerge within the next year as a viable national competitor to Best Buy, dealers we polled said. Wal-Mart might well continue to rival Best Buy in some categories, but it competes for different customers than those who shop Best Buy, retailers said. “We probably need fewer players in the market right now and that will make the pie bigger” for those dealers that survive, Perlman said.

“Clearly the industry doesn’t have another name like Circuit’s right now and what will likely happen is everybody gets a piece,” of its business, Workman said. “Much like when CompUSA went away on the computer side, everybody picked up some piece of that business.” CompUSA closed the last of its stores in 2008.

Circuit City’s liquidation also will unleash a flood of vacant stores on a market already drowning in abandoned store fronts. Last year, a raft of retailers including Boscov’s, Sharper Image, Mervyns, Linens ‘n Things, Whitehall Jewelers and Steve & Barry’s filed for bankruptcy. Boscov’s has since reemerged, but last week Goody’s Family Clothing and Gottschalks Inc. filed. Many other retailers are expected to follow as they run short of working capital or can’t finance their debt, analysts said. The retailers that remain will weigh expansion plans carefully and are likely to drive a hard bargain to lease space, they said.