This morning, Circuit City filed a bankruptcy petition (see bloomberg.com article), In Re Circuit City Stores Inc., 08-35653, with the U.S. Bankruptcy Court for the Eastern District of Virginia. If you’ve been following this blog, you won’t be surprised by today’s filing. Circuit City has had one foot in the grave for a while now (see our article from last week). See additional coverage of this story by Forbes, The Associated Press, The New York Times, Barron’s and Reuters.
The Richmond Times-Dispatch reported that last Friday, up to 800 employees at Circuit City’s corporate headquarters (more than a third of the workers there) received pink slips.
Circuit City owes well over half a billion dollars to suppliers including Hewlett-Packard, Samsung, Sony, Zenith, Toshiba, Garmin and Nikon. With bankruptcy looming, more and more vendors have refused to extend credit to Circuit City. With today’s filing, we’re pretty sure their ability to obtain terms from vendors is now pretty much non-existent. It probably also ensures that the New York Stock Exchange will de-list Circuit City, as they have already warned, if their share price doesn’t make a sustained recovery to above $1.00 a share. In early trading today, Circuit City shares have lost more than 90% of their value, falling from a lofty $0.12 per share when the market opened, and now sitting at an embarrassing two pennies a share (but that’s at least twice as much as we think its worth, so you could say its overvalued).
Well, that didn’t take long. The latest milestone on the devolution of Circuit City has occured. Circuit City shares have been delisted from the New York Stock Exchange (NYSE), and are now trading on the Pink Sheets. With all these pink slips and pink sheets, maybe pink is Circuit City’s new color. Circuit City is now what is referred to as a “penny stock”. That light you see at the end of the tunnel just may be the oncoming Best Buy Express. Click here to get a quote on Circuit City shares (CCTYQ.PK)
Things have gone steadily downhill for Circuit City since they made the absolutely brilliant business decision in March of last year, to fire 3,400 of their most experienced employees. Consumerist.com has posted
this excellent timeline of Circuit City’s decline, titled “How Circuit City Came Undone”, which shows their declining stock price in relation to various events in their demise. The graph looks a lot like a ski slope. It’s the sort of thing they’ll probably use in business schools, when teaching a course in how to destroy a successful company.
Perhaps the saddest part of this modern day Greek tragedy is the fact that the executives who were the architects of this debacle earned millions of dollars for their role in the company’s failure. Perhaps the new scrutiny that the country’s economic meltdown is focusing on executive compensation will cause the directors of corporations to hold their executives responsible for the bad decisions they make. Here’s a suggestion… Instead of simply lavishing millions of dollars in company stock on executives, how about adding the condition that they won’t be vested unless there is a certain number of quarters of future growth. For instance, Mr. CEO, that five or ten million dollars worth of company stock won’t be yours unless the company makes money over the next two years. No more “take the money and run”. For too many corporate executives, it has been a game of “heads I win, tails I win”.
Given Circuit City’s history and reputation, the decrepit state of the U.S. economy, and the competition that exists in the consumer electronics space (especially from competitors Best Buy and Walmart), we think it’s a safe bet that Circuit City will never emerge from bankruptcy, and that’s, as Martha Stewart would say, “a good thing”. Last week, they announced the closing of many of their stores, and we wouldn’t bee surprised if more closings follow before the end of the year.
Coming at the beginning of the holiday shopping season, the closings and the bankruptcy filing might attract some bargain hunters, but let’s be honest… Who wants to make a major purchase from a retailer who may very well not be around, should you need to return an unwanted or defective purchase. It pretty much goes without saying that anything purchased at a going-out-of-business sale is sold as-is, no returns, no refunds. Caveat emptor.
We’re going to go out on a limb here, and make the following prediction; Circuit City’s Chapter 11 bankruptcy will become a Chapter 7 filing (liquidation) within six months, perhaps much sooner. Check back here to see how our prediction fares.
– Routing By Rumor