By Andria Cheng, MarketWatch
NEW YORK (MarketWatch) — Circuit City Stores Inc. said Monday it’s shutting 155 U.S. underperforming stores, reducing future store openings and renegotiating leases to help preserve cash after its liquidity deteriorated and vendors tightened the struggling electronics retailer’s payment terms.
The closings will result in a reduction of about 17% in the company’s U.S. work force, Richmond, Va.-based Circuit City said.
As a result of the closings, Circuit City’s exiting U.S. 12 markets, and management’s considering all available options and alternatives to restructure its business.
The company also halted the opening of at least 10 locations that it had planned for this year while suspending openings completely next year and asking landlords for lower rents on some of its leases.
As of Oct. 31, Circuit City had 712 stores and nine outlets in the U.S. Its international segment operated through 770 retail stores and dealer outlets in Canada as of Sept. 30.
Analysts estimate the number of store closings represent about 12% to 13% of Circuit City’s domestic sales.
Circuit City shares jumped 46% to 38 cents a share in midmorning trading. Even with that, they still lost 91% of their value this year amid Wall Street concerns the company’s declining operating results and liquidity may lead it to go under and eventually file for Chapter 11 bankruptcy protection.
Also higher were shares of larger rival Best Buy Co. which is expanding its electronics business, will benefit as well, analysts said.
Declining consumer confidence and a significantly weakened retail environment have hurt Circuit City’s sales and gross profit margin rate more than it had anticipated previously, the company said.
Some of the company’s vendors, which also are facing tightened credit terms from their lenders, are asking Circuit City for payment before they ship products and have limited the credit available for purchases — including not giving Circuit City the customary increases in credit line for holiday purchases. That tightening in terms and credit availability is becoming “unmanageable,” Circuit City said.
Even before the downturn in the economy and the crisis financial markets, Circuit City had lost sales, hurt by its stores in less favorable locations compared to Best Buy, by increased competition from the likes of Wal-Mart and by an earlier move to let go of higher-paying staff who were able to push more profitable sales, analysts said.
“We believe that a bankruptcy filing is largely unavoidable,” said Bernstein & Co. analyst Colin McGranahan. “We expect the remaining stores to be under continued pressures.”
Circuit City also hasn’t been able to collect an income-tax refund of about $80 million that it said it’s owed from the federal government.
“Since late September, unprecedented events have occurred in the financial and consumer markets causing macroeconomic trends to worsen sharply,” said James Marcum, acting president and chief executive of Circuit City.
“The weakened environment has resulted in a slowdown of consumer spending, further impacting our business as well as the business of our vendors. The combination of these trends has strained severely our working capital and liquidity,” he said.
Andria Cheng is a MarketWatch reporter based in New York.
