Circuit City files for bankruptcy protection amid gloomy Christmas trading

Circuit City Stores, the number two US consumer electronics retailer, filed for bankruptcy on Monday just weeks before the start of the holiday shopping season, becoming the largest retailer to file for Chapter 11 in the US since Kmart in 2002.

Circuit City fell victim to tighter credit terms from vendors, a dwindling cash position and decreased consumer spending amid a deepening economic crisis.

The filing comes one week after the 59-year-old retailer said it would close 155 US stores, or more than one-fifth of its retail base, and cut 17 percent of its US workforce.

The retailer and 17 affiliates filed for protection from creditors in US bankruptcy court in Richmond, Virginia, where it is based. Its Canadian operations also filed for creditor protection in an Ontario court.

Analysts said there was now a possibility the company would close more US stores as it negotiates to exit costly leases in Chapter 11.

"Don't rule anything out yet," said Jefferies & Co analyst Dan Binder. "You could go away, you could restructure to something smaller, maybe somebody buys the brand and a couple hundred stores and maybe it ends up a regional player."

The company could face an uphill struggle to reorganise and emerge from bankruptcy since credit is tight and consumer spending has plummeted.

"It has a lot to do with the macroeconomic crisis in the world right now," said Aravindh Vanchesan, programme manager for the retail systems group at consulting firm Frost & Sullivan. "Right now, customers are cutting back on spending."

RECENT LAYOFFS

Circuit City received court approval for a $1.1 billion (£675 million) debtor-in-possession revolving credit facility that would provide critical liquidity while it reorganises.

The financing is provided by the lenders of Circuit City's current asset-based credit facility and enables it to pay vendors and other business partners in the ordinary course for goods and services received after the filing.

"These approvals will help position us for a more successful holiday selling season and allow us to operate our business and serve our valued guests without interruption,"said James Marcum, vice chairman, acting president and chief executive officer of Circuit City, in a statement.

Circuit City expressed hope it would be able to emerge from Chapter 11 in the first half of 2009.

In a filing, the company said 1,300 workers were laid off on the 7th of November. That day, the Richmond newspaper reported that hundreds of workers had been let go from company headquarters.

The Chapter 11 filing caps a tough two years for the company, which posted losses for five of the past six quarters and faced a proxy contest from a major shareholder this year. Movie-rental firm Blockbuster withdrew a takeover bid for Circuit City in July.

SUPPLIER SQUEEZE

In recent weeks, suppliers pinched by the global credit crunch have tightened terms, sometimes requiring upfront payment from Circuit City before shipping goods.

Industry leader Best Buy and discounter Wal-Mart Stores are expected to benefit from electronics store closures in the longer term, analysts have said.

But the flood of discounted merchandise from liquidating Circuit City stores could hurt Best Buy this holiday shopping season, which is expected to be one of the bleakest in recent years as consumers grapple with rising unemployment and the soft economy.

"Longer term, you've got Best Buy, who's dominant in the sector, taking share. But in the short run it could feel the pain of the liquidation activity," Binder said.

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