The announcement of Circuit City filing for Chapter 11 bankruptcy protection yesterday sent shock waves through the electronics industry. The bankruptcy announcement was on the heels of an announcement last week that Circuit City would be closing 155 stores, including all stores in Kansas City and Phoenix, all but one store in the Atlanta area, 14 of 17 stores in the region, and 10 of 14 stores in the San Francisco Bay area.
This is also after regional electronics retailer Tweeter sold their assets to a liquidation company and filed for bankruptcy protection last week. This is the second time in two years Tweeter had filed for bankruptcy.
While Tweeter is going through a company-wide liquidation of product, Circuit City just got a $1.1 billion dollar loan to help keep it going through the Christmas selling season. The loan will allow Circuit City to continue to procure products while liquidating the inventory of the closing stores and hopes to emerge from bankruptcy protection in 2009.
Circuit City's bankruptcy filing came after their major suppliers cut off all credit terms to the Richmond, VA-based chain over the weekend. Circuit City owes Hewlett-Packard nearly $119 million (couldn't happen to a better company), Samsung about $116 million, Sony Computer Entertainment (PlayStation 3) $60 million, LG Electronics (Zenith) $41 million and Toshiba $18 million.
The Circuit City bankruptcy announcement was anticipated for quite some time. There were a number signs leading up to the announcement that Circuit City had been losing money for quite sometime. Over a year and a half ago, Circuit City fired over 3400 salespeople because the company deemed they were making too much money. They then hired a number of salespeople making just over the minimum wage. Many of these new salespeople were not seasoned in the art of sales and Circuit City sales began to fall.
Circuit City reported even wider losses than anticipated for their fiscal quarter that ended on August 31. The chain lost over $239 million in the period, compared to losses of $63 million in the same quarter in the prior year. Sales dropped nearly 10% during the quarter.
Tweeter announced toward the end of October they had closed all their distribution warehouses, told employees to cancel all deliveries and installations scheduled after November 14, and sold the inventory to a liquidator. Tweeter had reported a loss of $40 million dollars in an Oct. 20 filing in U.S. Bankruptcy court.
While Tweeter's losses weren't as large as Circuit City's, the company knew that if Circuit City announced store closing, liquidations and bankruptcy first, Tweeter would have little to no chance of recouping any money through sales of their inventory. Tweeter did a pre-emptive strike in the audio/video world by announcing their intentions first giving them a head start over Circuit City.
Tweeter was a major retailer for my company. We sold them Focal loudspeakers and Cambridge Audio electronics. While they owe our company a lot of money, it's not as bad as others. Sony ($1.7 million owed), Samsung ($865K) and Pioneer ($554K) topped the list of manufactures Tweeter owed money to. Let's just say I don't anticipate getting any type of a Christmas bonus this year.
Although the Chicago area stores that I called on for Tweeter were profitable - well, 7 of the 8 stores were profitable - many of the stores in Arizona, Texas, Georgia and Florida were not. They were caught up in the housing crunch in those areas and custom installation sales dropped dramatically. Schultze Asset Management Group, who bought the assets of Tweeter during a bankruptcy auction last year, had recently gone through a change of upper management. They brought in an expert in corporate restructuring to head the company on an interim basis, but less than two weeks later they had pulled the plug.
There are two major concerns within the industry with the bankruptcy filings and liquidations from both Tweeter and Circuit City. One is for the short term, the other for the long term.
The short term concern is more for smaller A/V retailers this fall and holiday selling season. The market is literally getting flooded with televisions, audio gear and computers selling as little as 60 cents on the dollar. Tweeter had a total inventory of $400 million in their 94 stores across the nation, while Circuit City listed inventory assets of over $3 billion dollars in their locations. While 155 of the 714 stores in the United States will close, Circuit City hopes they'll be able to raise $350 million in cash from sales in those closing locations.
The long term concern is more for manufacturers and vendors. Many in the industry feel that if Circuit City doesn't come out of bankruptcy, the amount of retailers that will sell national brand names suddenly becomes much lower. Best Buy, WalMart and Amazon.com are the three biggest electronics retailers. The less avenues manufacturers or vendors have to sell their goods, the more power the larger retailers have over the manufacturers and vendors in regard to inventory, pricing and even model selection.
We're hoping the downturn in the economy will bottom out and begin a slow climb back toward levels we saw in previous years. But for now, the consumer will be the winner when it comes to buying electronics, while retailers, manufacturers and vendors will be paying the price. Am I concerned for my job? Yeah, a little. But we're a strong company and we have other irons in the fire to help us get past this major bump we've just experienced with Tweeter. We'll be fine.
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