Lisa Scarboro
Case Study #1
Circuit City Bankruptcy
December 1, 2008
On Monday, November 10, 2008, Circuit City filed for Chapter 11 bankruptcy.
For a couple months, even before the filing, the second largest electronics chain had been
anticipating the possibility of bankruptcy. At the date of Circuit City’s filing of
bankruptcy, the company had $3.4 billion in assets and $2.32 billion in liabilities.
Circuit City filed for a Chapter 11 bankruptcy to ensure that the company could
hold off creditors while it attempts to update and even restructure its finances and
supplier relationships in order to get product to sell, especially over the holiday season.
The biggest suppliers to Circuit City, Hewlett Packard (HPQ), Samsung Electronics and
Sony (SNE), know this is bad news for them at this time. The big suppliers have, all this
time, been threatening to withhold products during the holiday season from Circuit City,
creating a lot of fear and pressure about Black Friday and the entire Christmas season.
In the bankruptcy file, Circuit City negotiated for a $1.1 billion debtor-inpossession revolving credit accommodation to complement its working capital.
“(Filing for bankruptcy) should provide us with the opportunity to strengthen our
balance sheet, create a more efficient expense structure and ultimately position the
company to compete more efficiently,” said interim James A. Marcum, Vice chairman
and Chief Executive Officer to Circuit City, who plans to stay in business while under
bankruptcy and work on a restructuring with transposition specialists at FTI Consulting
(FCN).
Some of the ethical issues involved in the Circuit City bankruptcy filing are
decision makers that made choices resulting in the leasing of cheap real estate in
subjacent locations to save money in the long-run, starting back in the 1990’s. Circuit
City also made the decision to lay-off their most seasoned and accomplished employees
and high-position holders in order to cut costs and hire lower-waged workers to take the
higher paid employees positions. These moves resulted in the lowering of morale in the
Circuit City workplace and the loss of customer and satisfaction count.
Circuit City not only decided to lay off employees, but to close down
approximately 155 of its stores to help them through the holiday season. CEO, Philip
Schoonover, had been concerned that closing all these stores would be highly expensive
due to long-term leases in these areas. Because of the Chapter 11 bankruptcy filing,
however, that problem had been temporarily taken care of.
Before the Chapter 11 bankruptcy, big movie-retailer, Blockbuster had planned to
acquire the money-losing Circuit City in hopes to boost their assets, but then backing out,
and hence moving Circuit City’s stock even further down by 15% to $2.14 a share.
Statistics that led electronic statisticians to believe Circuit City was moving
toward disaster showed that during 2007 year sales, Wal-Mart’s consumer electronic
sales accumulated them $17 billion, while Best Buy, the number one consumer electronic
retail seller, had $28 billion in sales and Circuit City came in at just under $11 billion in
consumer electronic sales that year. If Circuit City were to close all of its 1,400 stores
worldwide, there would be, up for grabs, about $10.5 billion electronic consumer goods.
Best Buy is in a great position to subsidize the liquidation of Circuit City’s electronic
goods as well, creating a good situation for their company. Best Buy stores are located in
85% of the Circuit City markets and they also have the upper-hand on Wal-Mart, due to
their standards of keeping in-store assistance, something you can not get at Wal-Mart.
Although Circuit City has lost more than $5 billion in stock over the past two
years and they have competitors ready to jump on the opportunity to grab up the
consumer electronic products at hand, Circuit City could have a total turn-around, and
come back strong because the consumer market understands that Circuit City is a wellknown brand. David Schick, Stifel Nicolaus & Co. analyst said that "We believe the
marketplace has a slot for a higher-end chain with a commissioned sales force." It may
take some time to come up with a solution to help out Circuit City’s problems, but only
time will tell.