Short Circuit in the Electronic City

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In the end, Christmas came too late for Circuit City (NYSE: CC  ) .

The consumer electronics superstore chain is filing for Chapter 11 bankruptcy protection. It was inevitable. The company's financial health was dimming, and with that comes the threat of vendors holding back merchandise during the time of year when Circuit City can least afford to run empty. With a new $1.1 billion debtor-in-possession revolving credit line in place, suppliers will be reasonably assured of getting paid for any wares shipped after today's filing.

Shareholders won't be as lucky. They are typically wiped out in Chapter 11 bankruptcies, once creditors and suppliers fight for what's left.

Circuit City tried. It announced massive layoffs last month, as well as plans to close 155 underperforming stores. With more corporate pink slips announced last week, Circuit City will have trimmed 20% of its combined workforce and store base.

The challenge now will be to keep holiday shoppers coming. The stigma of filing for bankruptcy reorganization is huge for a consumer-facing company. Most customers don't know the difference between Chapter 7 liquidation and Chapter 11 reorganization. So it's going to be a hard sell to get customers to snap up holiday gift cards they perceive as going stale or buying big-ticket items that they fear they won't be able to return.

Bad news for Circuit City is good news for everybody else. Healthier industry leader Best Buy (NYSE: BBY  ) will gladly welcome the confused Circuit City loyalists. Smaller chains like Conn's (Nasdaq: CONN  ) and hhgregg (NYSE: HGG  ) that have been consistently profitable will also benefit from the filing. As long as Circuit City doesn't find itself putting out ridiculous markdowns to win shoppers -- something that can clearly happen in a year that will plainly lend itself to intensive discounting -- the rest of the industry will come out ahead. Even niche specialists like GameStop (NYSE: GME  ) for video games and RadioShack (NYSE: RSH  ) for electronics can fit the bill with a less daunting anti-superstore footprint.

The one company going "whew" right now is Blockbuster (NYSE: BBI  ) . It had entertained a bid for Circuit City earlier this year, before wisely deciding against it. The same goes for the private equity firms that were roundly rebuffed in their buyout efforts a few years ago.

It's going to be a blue Christmas for Circuit City, no matter how red the stores look.

Other ways to see more than just the red in the Circuit City logo:

Creative Corner: How would you save Circuit City? Post your turnaround thoughts in the comment box below.

Best Buy is a recommendation of the Motley Fool Inside Value newsletter service. GameStop and Best Buy are Motley Fool Stock Advisor picks. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days. Now is absolutely the wrong time to bail from the market; we will tell you why and show you all of our stock picks.

Longtime Fool contributor Rick Munarriz doesn't go to his local Circuit City store the way he used to. He doesn't own shares in any of the stocks in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 10, 2008, at 10:06 PM, saleboutique wrote:

    Let's not lose sight of the fact that Circuit City has been getting hammered for years. Best Buy offers better pricing, selection and service in a physical store and Internet stores offer infinite selection and better prices. This is just another example of a bad company that can't survive a downturn.


  • Report this Comment On November 18, 2008, at 12:19 PM, zgreenwell wrote:

    Best Buy never had better prices. They had better selection and, though I hate to say it (because they still aren't that great), better service. It really didn't matter though because if you walked into a circuit city and tried to buy anything the associates looked at you like you just ruined their day. It was almost impossible to buy something that wasn't out on the floor.

  • Report this Comment On January 16, 2009, at 11:50 AM, wrongnumber wrote:

    Circuit City to liquidate. Expect this to landlords. See post on One Liberty Properties.

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11/10/2008 4:08 PM
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