Circuit City Pulls the Plug, More than 30,000 Lose Jobs

January 16, 2009

Circuit City Interior in Van Ness, California

Beleaguered Circuit City (OTC: CCTYQ.PK) — the nation’s No. 2 electronics retailer — which filed for Chapter 11 bankruptcy restructuring in November, has pulled the plug on its 567 U.S. stores and is proceeding to full liquidation to satisfy creditors. Acting Circuit City chairman James A. Marcum made the announcement this morning. The demise of Richmond, Virginia-based Circuit City will leave its more than 30,000 employees out of work…today.

Circuit City was unable to find a buyer or get refinancing. Basically, no one wanted to lend them money and no one wanted to buy the company. In additional news for those unlucky enough to be stockholders, the stock had lost 73 percent of its value by 1 PM today and was at four cents a share. In its morning press release, Circuit City said: “The company does not anticipate any value will remain from the bankruptcy estate for the holders of the company’s common equity, although this will be determined in the continuing bankruptcy proceedings.”

If U.S. Bankruptcy Court Judge Kevin R. Huennekens approves the agreement in Richmond later today, going-out-of-business sales of the company’s almost $2 billion of retail inventory could begin as early as tomorrow. Sandy Feldman, senior vice president of Great American Group LLC, one of the firms hired to liquidate Circuit City’s assets, said: “We’ve got to be out of the stores by March 31…The sales will begin this weekend.”

Philip Schoonover, CEO of Electronics Retail Giant Circuit City, Which is Going Bankrupt

Circuit City will thus become the first major post-holiday casualty of the recession. The company’s woes are myriad, but one key downturn came in 2007, when CEO Philip Schoonover fired 3,400 of the company’s most experienced employees. The strange rationale was that the experienced workers were making too much money. And so, they were replaced with less expensive, inexperienced workers. It showed. Customer service declined and employee morale plummeted. As portfolio manager Bob Bacarella of Wheaton, Illinois-based Monetta Funds noted in a Business Week article: “Obviously, if customers prefer to walk into a Best Buy rather than a Circuit City, which carry almost exactly the same things, the only point of difference is customer service.” Bacarella is a shareholder in Best Buy (BBY), Circuit City’s primary competitor. Ironically, Schoonover is a former Best Buy employee.

In addition to poor management decisions and fierce competition from Best Buy, Circuit City and other electronics retailers suffered sales problems that date back to the 2006 Christmas holiday shopping season. When Wal-Mart (WMT) broke the $1,000 price-point barrier on 43-inch flat-screen TVs, a retail meltdown began for numerous electronics retailers. Tweeter Home Entertainment Group (TWTR) ultimately filed for bankruptcy. Dayton, Ohio-based Rex Stores (RSC) closed dozens of regional stores. Circuit City closed 70 U.S. stores, sold its 800 Canadian stores, and laid off 3,400 employees. But, ultimately, no combination of techniques such as bankruptcy protection, layoffs, price reductions and store closings was successful at a time when a deep recession also brought historically low sales.

Read about a message which angry investors left for Bernard Madoff.

Photo credit: Herrero Contractors, Inc. / San Francisco, CA

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