Did Circuit City Find a Rescuer? - January 9, 2009

Has Circuit City found a savior? In a statement released early Friday morning, the company confirmed reports that the there may be a possible sales of the company as “two interested parties” have made it known that they may be interested in what used to be the nation’s No. 2 electronics retailer.

The possible investors have made it clear the possible purchase will be a going concern. A going concern is an accounting term that relates to a buyer acquiring a business without the intention or threat of liquidating any assets from the company to be acquired.

With two potential buyers, Circuit City intends on holding an auction for the sale of the company. If the sale goes threw, it could mean that the company could emerge from bankruptcy with its entire business unharmed.

"If that doesn't happen and these deals fall through, then it is very likely that it could go out of business," said Joseph Steinfeld, bankruptcy expert and managing partner with ASK Financial. "It's the same exact situation that confronted Linens N Things and the company was forced to liquidate."

Circuit City first filed for bankruptcy back in November as sales dwindled during the economic crunch that took its toll on numerous retailers and businesses as a whole. During the company’s 3rd quarter, leading up to the Chapter 11 filing, sales had plummeted more than 13%, which is a deadly sign ahead of the holiday shopping season. On top of that, the company’s stock price had lost more than 90% of its value since the beginning of 2008.

"While the company is optimistic that a transaction can be successfully finalized, no assurance can be given that this will occur," the company announced in a statement released earlier this morning.

By the end of August 2008, the company had more than $3.4B in total assets, and $2.32B worth of liabilities. Operating more than 565 stores throughout the U.S. and an additional 765 stores in Canada, Circuit City had closed nearly 20% of their stores to help offset the oncoming pressures of going out of business. Over the past two years, the company had posted losses in seven of the last eight quarters heading into their bankruptcy filing.

Other mistakes were made by the company as well. The first blunder the company made, after posting such a successful decade in the ‘80s, was in real estate. At the start of the ‘90s, with money flowing in, the company went on to make less-lucrative real estate deals in which the company acquired enormous building in less-desirable areas that, in retrospect, actually pushed customers away.

In the interim, Circuit City’s biggest rival, Best Buy Co. Inc. (BBY) played their cards more conservatively. Looking for better real estate deals, better locations, and better business practices, which proved to be their saving grace as the markets turned dramatically by the turn of the millennium.

After learning of Circuit City’s recent developments, Best Buy offered their own news, revising their 2009 profit forecasts. With the company reducing their workforce and consumers tightening their budgets, Best Buy stated that the company now anticipates earnings between $2.50 and $2.70 per share, narrowing its range from $2.30 to $2.90 per share.

With companies such as Best Buy, Costco (COST) and Wal-Mart (WMT) increasing their market presence in offering low-cost electronics, any investor coming in and looking to buy Circuit City better have substantial funds in order to repel significant losses in the upcoming years.

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