Circuit City files for Chapter 11 Bankruptcy

circuitcity1Circuit City Stores has filed for Chapter 11 Bankruptcy protection. The company will go before the bankruptcy court today in an expedited hearing. BizSense has also obtained the letter sent to employees this morning.

On Friday the Henrico-County electronics stored laid off around 800 employees at the Richmond headquarters. Most received no severance package, according to an employee who was laid off.

The NYSE halted buying and selling of the shares after the stock’s early plunge.

Generally Chapter 11 protection allows a company to renegotiate lease and debt terms and provides a temporary reprieve. Sometimes a company can emerge stronger. But the sluggish economy will make that a challenge for Circuit City. It’s also unclear how the company plans to sell more products instead of just cutting overhead.

According to a Circuit City press release, “Operating under the protection of Chapter 11 will provide the company’s vendors with assurances that they will be paid for merchandise the company receives post-filing so the company can be sufficiently stocked for the holiday selling season. Further, the company intends to create a restructuring plan that should allow Circuit City to emerge as a stronger business with an improved national distribution channel for its vendors and a more compelling offering for its customers.”

The November-December holiday shopping months are crucial to retailers since the two months can account for 50% or more of merchants’ annual profits and sales.

Circuit City says it has more than $1 billion in assets and more than $1 billion in liabilities. The company says it anticipates it would have money to distribute to unsecured creditors, who get paid last. For example, Circuit City owes computer manufacturer Hewlett Packard $119 million, according to the filing.

In a news release, the company said it, “intends to build on recent efforts to streamline the company and create a stronger, more competitive business,” and that it plans to continue operating the business “without interruption.”

According to the company’s Chapter 11 filing with the U.S. bankruptcy court in Richmond, Circuit City will continue to do business and pay its workers while it restructures debt and its business operations. According to filings, the law firm of McGuireWoods is representing the company.

Shares of the company’s stock plummeted another 50% in early morning trading. It’s also unclear how the filing will affect sales, since consumers might be less willing to buy expensive electronics if they can’t be sure the company will be around to honor returns or warranty issues.

On Sunday Greg Gilligan wrote an extremely well-sourced story about how the company arrived in such a pickle. It’s a must-read.

Writes Gilligan: “Best Buy unseated Circuit City as the nation’s top consumer-electronics retailer by revenue in 1995. A year later, Best Buy faced its most severe financial challenge, but it has soared ever since while Circuit City sales have languished, particularly in the past several years.

Even after bringing in a former Best Buy executive, who was named Circuit City’s president in 2005 and CEO in 2006, the chain couldn’t turn around the business. Philip J. Schoonover left seven weeks ago.

Many say Circuit City is paying the price for its slip-ups. It has posted a loss in five of the past six quarters. Its stock is trading for less than the cost of a postage stamp.”

Downtown Shortpump.com, a news site for Western Henrico that partners with BizSense on business news, has received an anonymous email containing the letter that CEO Jim Marcum sent to the staff. It is reproduced below:

Dear Associates,

You may have seen today’s announcement that Circuit City has filed a voluntary petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code. While words like “bankruptcy” and “Chapter 11? may sound scary, this does not mean Circuit City is going out of business. As difficult as this decision was, we believe we will be able to emerge as a stronger company. I want to give you an overview about how this will help our company and how we arrived at this important decision.

Recently we have taken some important actions to create a more efficient chain with a streamlined cost structure. We believe these changes are absolutely critical for the organization as we move forward. Last week we announced the closure of 155 domestic segment stores. In addition, late last week, we made certain workforce reductions in the field and at our corporate headquarters.

Despite these efforts to reduce costs, our liquidity situation has deteriorated in the wake of the economic and business challenges we have been facing. Vendor concerns about the company’s liquidity and ability to pay for its purchases have escalated considerably since we provided an update on our liquidity position last week. The situation required us to take action, especially as we head into the important holiday selling season. As a result, the company determined the best direction is to restructure our business under the protection of Chapter 11.

A formal restructuring should give us the time and resources we need to address our financial challenges while we continue our normal operations. Importantly, operating under the protection of Chapter 11 also provides the company’s vendors with assurances about payments which should help us be sufficiently stocked for the holiday season. Restructuring should also allow us to strengthen our balance sheet, create a more efficient expense structure and, we believe, position the company to compete more effectively. We hope to emerge as a stronger business with an improved national distribution channel for our vendors and a more compelling offering for our customers.

It is important to note the following:

  • As a first step, we have asked for customary Court authority to pay our associates in the ordinary course, just as we did prior to the Chapter 11 filing.
  • We expect to pay our vendors for all goods delivered and services provided after the filing.
  • We remain committed to being the destination of choice for our guests’ consumer electronics needs, and our stores should be sufficiently stocked for the holiday season

We understand how difficult the recent announcements have been on everyone at this company, and we recognize the changes personally affect many people you have worked with day to day. Further, we know there is never a good time for individuals to be impacted by decisions like these, and we deeply regret the effect this has had on our associates. Please know that we took these difficult, but necessary, business actions only after significant deliberation.

In the meantime, we remain committed to providing you with as much information as possible. We will soon post a copy of the press release related to today’s announcement as well as other relevant materials on circuitcity.com. If you have further questions or concerns, please speak with your supervisor who will help you find the information you need.

In closing, I want to thank you all for your loyalty and dedicated effort as we go forward. I strongly believe that by taking the right actions now, this business can move forward effectively. We have a 60-year history as a leader in the consumer electronics industry, and with your help and support, we can all do our part to ensure that Circuit City will emerge as a stronger business with a solid financial footing.

Sincerely,

Jim Marcum
Vice Chairman and Acting President and Chief Executive Officer
Circuit City Stores, Inc.

circuitcity1Circuit City Stores has filed for Chapter 11 Bankruptcy protection. The company will go before the bankruptcy court today in an expedited hearing. BizSense has also obtained the letter sent to employees this morning.

On Friday the Henrico-County electronics stored laid off around 800 employees at the Richmond headquarters. Most received no severance package, according to an employee who was laid off.

The NYSE halted buying and selling of the shares after the stock’s early plunge.

Generally Chapter 11 protection allows a company to renegotiate lease and debt terms and provides a temporary reprieve. Sometimes a company can emerge stronger. But the sluggish economy will make that a challenge for Circuit City. It’s also unclear how the company plans to sell more products instead of just cutting overhead.

According to a Circuit City press release, “Operating under the protection of Chapter 11 will provide the company’s vendors with assurances that they will be paid for merchandise the company receives post-filing so the company can be sufficiently stocked for the holiday selling season. Further, the company intends to create a restructuring plan that should allow Circuit City to emerge as a stronger business with an improved national distribution channel for its vendors and a more compelling offering for its customers.”

The November-December holiday shopping months are crucial to retailers since the two months can account for 50% or more of merchants’ annual profits and sales.

Circuit City says it has more than $1 billion in assets and more than $1 billion in liabilities. The company says it anticipates it would have money to distribute to unsecured creditors, who get paid last. For example, Circuit City owes computer manufacturer Hewlett Packard $119 million, according to the filing.

In a news release, the company said it, “intends to build on recent efforts to streamline the company and create a stronger, more competitive business,” and that it plans to continue operating the business “without interruption.”

According to the company’s Chapter 11 filing with the U.S. bankruptcy court in Richmond, Circuit City will continue to do business and pay its workers while it restructures debt and its business operations. According to filings, the law firm of McGuireWoods is representing the company.

Shares of the company’s stock plummeted another 50% in early morning trading. It’s also unclear how the filing will affect sales, since consumers might be less willing to buy expensive electronics if they can’t be sure the company will be around to honor returns or warranty issues.

On Sunday Greg Gilligan wrote an extremely well-sourced story about how the company arrived in such a pickle. It’s a must-read.

Writes Gilligan: “Best Buy unseated Circuit City as the nation’s top consumer-electronics retailer by revenue in 1995. A year later, Best Buy faced its most severe financial challenge, but it has soared ever since while Circuit City sales have languished, particularly in the past several years.

Even after bringing in a former Best Buy executive, who was named Circuit City’s president in 2005 and CEO in 2006, the chain couldn’t turn around the business. Philip J. Schoonover left seven weeks ago.

Many say Circuit City is paying the price for its slip-ups. It has posted a loss in five of the past six quarters. Its stock is trading for less than the cost of a postage stamp.”

Downtown Shortpump.com, a news site for Western Henrico that partners with BizSense on business news, has received an anonymous email containing the letter that CEO Jim Marcum sent to the staff. It is reproduced below:

Dear Associates,

You may have seen today’s announcement that Circuit City has filed a voluntary petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code. While words like “bankruptcy” and “Chapter 11? may sound scary, this does not mean Circuit City is going out of business. As difficult as this decision was, we believe we will be able to emerge as a stronger company. I want to give you an overview about how this will help our company and how we arrived at this important decision.

Recently we have taken some important actions to create a more efficient chain with a streamlined cost structure. We believe these changes are absolutely critical for the organization as we move forward. Last week we announced the closure of 155 domestic segment stores. In addition, late last week, we made certain workforce reductions in the field and at our corporate headquarters.

Despite these efforts to reduce costs, our liquidity situation has deteriorated in the wake of the economic and business challenges we have been facing. Vendor concerns about the company’s liquidity and ability to pay for its purchases have escalated considerably since we provided an update on our liquidity position last week. The situation required us to take action, especially as we head into the important holiday selling season. As a result, the company determined the best direction is to restructure our business under the protection of Chapter 11.

A formal restructuring should give us the time and resources we need to address our financial challenges while we continue our normal operations. Importantly, operating under the protection of Chapter 11 also provides the company’s vendors with assurances about payments which should help us be sufficiently stocked for the holiday season. Restructuring should also allow us to strengthen our balance sheet, create a more efficient expense structure and, we believe, position the company to compete more effectively. We hope to emerge as a stronger business with an improved national distribution channel for our vendors and a more compelling offering for our customers.

It is important to note the following:

  • As a first step, we have asked for customary Court authority to pay our associates in the ordinary course, just as we did prior to the Chapter 11 filing.
  • We expect to pay our vendors for all goods delivered and services provided after the filing.
  • We remain committed to being the destination of choice for our guests’ consumer electronics needs, and our stores should be sufficiently stocked for the holiday season

We understand how difficult the recent announcements have been on everyone at this company, and we recognize the changes personally affect many people you have worked with day to day. Further, we know there is never a good time for individuals to be impacted by decisions like these, and we deeply regret the effect this has had on our associates. Please know that we took these difficult, but necessary, business actions only after significant deliberation.

In the meantime, we remain committed to providing you with as much information as possible. We will soon post a copy of the press release related to today’s announcement as well as other relevant materials on circuitcity.com. If you have further questions or concerns, please speak with your supervisor who will help you find the information you need.

In closing, I want to thank you all for your loyalty and dedicated effort as we go forward. I strongly believe that by taking the right actions now, this business can move forward effectively. We have a 60-year history as a leader in the consumer electronics industry, and with your help and support, we can all do our part to ensure that Circuit City will emerge as a stronger business with a solid financial footing.

Sincerely,

Jim Marcum
Vice Chairman and Acting President and Chief Executive Officer
Circuit City Stores, Inc.

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