Picture gets fuzzy for Circuit City

The bankruptcy filing of Circuit City Stores Inc. suggests that the retail environment is rapidly deteriorating.

The nation’s second-largest consumer electronics chain joined a long line of big retailers that have collapsed this year amid the faltering economy. The bankruptcy announcement Monday came only a week after the company said it was closing a fifth of its stores.

Circuit City said in its Chapter 11 filing that vendor concerns about the company’s liquidity and ability to pay for its merchandise “have escalated considerably� in the last week, forcing it to seek the protection of a Bankruptcy Court before the crucial holiday season.

The chain, which has faced stiff competition from Best Buy Co., Wal-Mart Stores Inc. and online electronics sellers such as Amazon.com Inc., said it planned to restructure.

But some analysts expressed doubts that Circuit City would emerge from bankruptcy and said the coming months would be decisive in determining the company’s future.

“I think it’s a tossup on whether they can come out or not,� said Jerry Mozian, a turnaround specialist who manages the restructuring division at consulting firm Tatum. “We’re headed into an extremely difficult 2009, and I don’t think anybody’s sure how bad it’s going to get.�

Circuit City is the latest of several large retailers to head into bankruptcy and announce store closures this year after Mervyn’s, Linens ‘n Things Inc. and Shoe Pavilion Inc. All told, major retailers have announced plans to liquidate more than 1,000 stores so far this year.

The collapse of another large, well-known company shed more concern on the worsening retail sector. As consumers continue to cut spending in favor of buying only the basics, analysts said the pre-holiday bankruptcy filings might be only a preview of an even tougher quarter for retailers after the new year.

Retailers “are going to try to get through the holiday season and then try to restructure,� said Lorenzo Marinuzzi, a bankruptcy lawyer at Morrison & Foerster in New York. “It could be a very interesting post-holiday season.�

Although Circuit City’s move was not unexpected, many thought the chain would make it through the holidays before seeking bankruptcy protection.

“Circuit City needed widespread vendor confidence, and they did not get it,� Marinuzzi said. “For liquidity reasons, vendor reasons and consumer confidence reasons, they probably needed to file before the holiday season to allow them to put products on the shelves and bring customers into the stores. . . . I don’t know that they could have waited any longer.�

A week earlier, Circuit City announced that it would close about 20% of its U.S. stores, leaving the company with 566 U.S. locations, by the end of the year. The stores to be closed include 24 in California, half in such Southern California cities as Compton, Pomona, Riverside and Thousand Oaks.

The financial crisis has also made it harder for consumers to finance the big-ticket items, such as flat-screen TVs and stereo systems, that Circuit City sells.

Acting Chief Executive James Marcum said in a statement to Circuit City customers that bankruptcy protection “will give us the time and resources to address our financial challenges.�

“It is important for you to understand that this announcement does not mean that Circuit City is going out of business,� he said.

Despite such assurances and massive liquidation sales at stores that are closing, analysts said the company could be further hurt by consumers reluctant to buy pricey items and gift cards from a struggling chain.

“Consumers need to think twice about buying anything at Circuit City, given that it may or may not be around in coming months,� said Greg Daugherty, executive editor at Consumer Reports. “We wish them well, but, as a consumer, it’s probably not worth taking the risk.�

Circuit City filed its petition for Chapter 11 in U.S. Bankruptcy Court in Richmond, Va., where the company is based. It lists $3.4 billion in assets and $2.32 billion in debts. The company, which was founded in 1949, said it obtained $1.1 billion in bankruptcy financing, which replaces a $1.3-billion line of credit.

Circuit City shares fell 15.5 cents, or 62%, to 9.5 cents.

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