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October 2, 2008

Chapter 7 or Chapter 11, Circuit City Management Needs to Make a Choice.

Analysis of: Circuit City Posts Loss As Sales Woes Continue | online.wsj.com
This analysis is solely the work of the author. It has not been edited or endorsed by GLG.
Analysis By:
Nicholas White, PresidentNicholas White
President, White & Co
Implications: Circuit City has passed being just another mediocre company that needs to be patched up.  Management needs to drastically down size this company or liquidate its assets.  Here's why 

Analysis: Selling as a penny stock, Wall Street has lost complete faith in both the company and managements ability to revive it.  The only thing that will save the company in the short term is to raise cash and drastically cut expenses. That only makes sense if Circuit City has a core customer that it can count on to buy their products and a core product offer that differentiates them from their stronger competitors.  

If a real turn around manger can write such a plan, they should file Chapter 11 now and try to get a DIP financing package.  Then sell off everything they don't need during Christmas and execute their new business model in January.  Whether DIP financing is available in today's hostile credit markets is problematic, but first things first, someone needs to write a good plan. 

Otherwise, shareholders and creditors would be best served if they filed Chapter 7 now and liquidated the business during the holiday selling season. 

Long term, that's probably the best out come for most stake holders and the CE industry too.  Granted, thousands of employees will lose their jobs. But the question of job lose at Circuit City isn't a question of if, but when. Any turn around will mean significant cuts in both home office and field staff.   Dislocations are inevitable and the sooner people get on with their careers and their lives the better. 

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