Circuit City's Future Looking Shaky

Circuit City, one of North America's leading technology retailers, could fall victim to the credit crunch. The firm is closing 155 of its 721 US stores this year in what it openly admits is an attempt to save the business.

The stores closing will be running stock clearance sales from now until December 31 when they cease trading. That's good news for bargain hunters, but also shows how serious the problems are: aside from Black Friday sales (the day after Thanksgiving), November and December are the months in which firms would normally be most anxious to charge full price.

The big problem seems to be Circuit City performing poorly at the worst possible time. Though total revenues top a billion dollars, sales have dropped and the firm lost $162.7 million in the most recent quarter. That's prompted manufacturers to be much less flexible about the credit terms they use when supplying goods to the firm, with some even insisting on full payment up front. (Source: arstechnica.com)

Standard & Poor, one of the leading (and ironically named) credit rating experts, says there is a "fair chance" Circuit City will be forced into Chapter 11 bankruptcy. That's where a firm gets temporary protection from creditors to give it a chance to reorganise and improve its financial standing.

The store closures are as much an attempt to avoid stock price falls as to cut costs. The New York Stock Exchange has just given Circuit City an official warning because its stock has consistently fallen below the one dollar mark. If the price doesn't average above one dollar across the next six months, its shares could be de-listed, meaning they'd no longer be traded on the main stock exchange.

Such a measure would not only make it extremely difficult for the company to ever raise more money by selling new shares, but it would likely trigger creditors to call in loans immediately, heavily increasing the risk of bankruptcy. (Source: investopedia.com)