Today’s financial news headlines and stories are about how Circuit City (CC) is closing 155 stores in the hope of staying in business.
The real story is in the fine print. Based on the current retail environment CC is unlikely to make it to 2009 without filing Chapter 11. The company’s shares may be up 57% today, but they still only trade at $.40.
In the same announcement as the one in which the retailer talked about shutting locations it made a few more points:
1. Waning consumer confidence and a significantly weakened retail environment have hurt the company’s sales and gross profit margin rate.
2. Following the company’s second quarter results announcement, its liquidity position and the sharply worsened overall economic environment led some of Circuit City’s vendors to take restrictive actions with respect to payment terms and the credit they make available to the company.
3.Due primarily to the weakened economic environment and its potential impact on the timing of sales of the company’s inventory and costs and expenses associated with such sales, a recent third-party appraisal conducted for the company’s asset-based credit facility resulted in a reduction of the estimated net orderly liquidation value of the company’s inventory.
CC is being good enough to tell investors it will not make it. There is growing evidence that banks will not give consumers additional access to debt for their credit cards. Some are even cutting allowable balances. Circuit City does not have the capital to offer customer financing on its own.
Many analysts think that sales at some large retail chains could be off as much as 10%. If consumers believe that CC will not be around, they will shop elsewhere.
Big CC competitors like Wal-Mart (WMT), CostCo (COST), and Best Buy (BBY) are going to cut their prices to the bone to get whatever store traffic is available in a deep recession.
There is nearly no case to be made that CC is around after Christmas.
Douglas A. McIntyre
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