Circuit City Files for Bankruptcy

With the chain's future in doubt and the economy in tatters, Best Buy, Wal-Mart, and online retailers look to pick up share in electronics

By Matthew Boyle and Aili McConnon

Circuit City once made a living by putting smaller gadget retailers out of business. Now the nation's second-largest consumer electronics chain has joined its dearly departed brethren by filing for Chapter 11 bankruptcy.

The beleaguered Richmond (Va.) retailer said on Monday, Nov. 10, it plans to stay in business while interim CEO James Marcum works on a restructuring with turnaround specialists at FTI Consulting (FCN). But successful Chapter 11 reorganizations in this space are rare, analysts say. Generally, consumers aren't likely to buy a gift card or an extended warranty from a store that's gone bankrupt. Examples abound of retailers that have gone into reorganization, emerged, then gone back to court. For example, Tweeter, another struggling electronics chain, emerged from Chapter 11 last year but just filed again and now plans to shut its 94 remaining stores.

Circuit City (CC) has lost more than $5 billion in stock market value over the past two years, and a bankruptcy filing has been anticipated for months (BusinessWeek.com, 7/2/08). Its business was gradually stolen away by discounters such as Wal-Mart (WMT), specialty chain Best Buy (BBY), and online sites like Amazon.com (AMZN) and Buy.com. In July, a proposed $1 billion acquisition by Blockbuster (BBI) fell apart. CEO Philip Schoonover quit in September under pressure from activist shareholder Mark Wattles.

Wal-Mart has vastly stepped up its commitment to consumer electronics over the past five years. Last year, Wal-Mart generated $17 billion in consumer electronics sales, while Best Buy did $28 billion and Circuit City did just under $11 billion, according to Pali Capital. Wal-Mart's market share has surged thanks to its low-price mantra—just this past weekend, the retailer unveiled discounts on hundreds of items, including Blu-ray DVD players marked down to under $200.

Good News for Best Buy

Should Circuit City ultimately close all of its 1,400 stores (it already announced plans to close 155 last week), that would leave approximately $10.5 billion in electronics goods up for grabs, according to Credit Suisse (CS) analyst Gary Balter. While Wal-Mart, Target, and online retailers have been gaining market share, some retail experts still see a role for a strong specialty electronics chain. They say Best Buy has appeal for consumers looking for knowledgeable buying advice as well as installation and service from the retailer's Geek Squad division.

Best Buy has locations in 85% of Circuit City's markets, so it is well-positioned to capitalize. "We believe Best Buy should take a disproportionate share of that business," Balter wrote in a note to clients on Monday. "This is a major positive for Best Buy."

Lately, Best Buy has made a concerted effort to woo women with in-store personal shopping assistants, to differentiate itself further from the mass merchandisers.