Summary
Vendors will continue to support Circuit until at least the first part of December Companies will watch carefully the weekly trends over the next 45 days Vendors can easily create a "run on the bank" if one or two large suppliers change their terms significantly
Analysis
Vendor credit support is critical for Circuit City as it enters the upcoming holiday period. With a tightened credit and credit insurance market currently in place, most vendors will be prone to being risk adverse to a Chapter 11 filing as it takes an enormous amount of sales volume to recover their potential loss given the operating margins of most of the CE manufacturers.
Most of the large manufacturers informally share their positions with one another regarding the larger retailers and tend to act in concert with each other in these situations. The removal of the agencies credit score is less of an issue to the top 25 vendors as it would be to the smaller suppliers since Circuit is most likely sharing key data with its most critical suppliers on a weekly basis to insure continued shipments under whatever terms are currently being made available.
This however exposes current trends to scrutiny well before the holiday season plays out. Most vendors probably feel comfortable for the next 45 days since there is sufficient resources to draw from to pay for these inventory purchases. The more risky period is for inventory purchases being taken in late November and early December which would have a January or February payables due date.
During this period if a vendor places themselves at risk with their normal terms to Circuit City, all that would need to occur is for one or two of the largest vendors to significantly cut their terms and you will have an immediate collapse of the vendor terms from all of their largest suppliers. If this were to occur, without the cash flow created through the vendor terms, Circuit does not have sufficient access to capital to self finance their inventory. This would force a Chapter 11 filing almost immediately as they would be unable to certify sufficient cash flow and resources available to fund operations forward for 12 months as required by public companies.
It is this risk that will most likely force the vendors into a self fulfilling prophecy by not wanting to be the last man holding the bag. The current environment only exacerbates this.
