PETITION

PETITION provides analysis and commentary about restructuring and bankruptcy. We discuss disruption, from the vantage point of the disrupted.

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PETITION provides analysis and commentary about restructuring and bankruptcy. We discuss disruption, from the vantage point of the disrupted.

📸Flashback: Chapter 11 Filing - Circuit City Stores Inc.📸

Over 35,000 Employees Lost Their Jobs

Ten years ago, on November 10, 2018, Circuit City Stores Inc., a Virginia-based publicly-traded operator of a chain of retail electronics stores, online websites and a telephone product call center filed for bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia. The company “sells, among other things, televisions, home theatre systems, computers, camcorders, furniture, software, imaging and telecommunications products, and other audio and video electronics.” In other words, basically everything you now have in your pocket in the form of an Iphone (and people wonder whether they can justify paying Apple $1,500). My, things have changed.

At the time of its filing, the company operated approximately 712 superstores and 9 outlet stores, ran two websites (including the now relaunched and rejuvenated circuitcity.com…seriously) and the aforementioned phone-order call center. It employed 39,600 full and part-time employees in their stores and corporate headquarters (not to mention an additional 11,000 part-time workers during the critical holiday season); it also had 1,000 merchandise vendors and 6,500 suppliers. In other words, this sucker was a beast during its day. It had approximately $900mm of funded debt.

For the fiscal year ending February 29, 2008, the company reported revenues of $11.74b and a net operating loss of $319.9mm. Thereafter, in its September 20, 2008 10-Q, the company reported additional losses of $403mm. Per the company’s bankruptcy filings,

The largest driver of declining performance was a double-digit decline in in- store traffic from the previous year.

These numbers would explain why Blockbuster Inc….yes, Blockbuster Inc., balked at acquiring the business in May 2008. Blockbuster performed due diligence and, knowing a dumpster fire when they see one, immediately ran for the hills. Thereafter, with the assistance of Goldman Sachs & Co. ($GS), the company ran an unrequited sell-side process.

With cash seemingly on fire and no potential strategic buyers interested, the company hired RothschildFTI Consulting Inc. and Skadden Arps Slate Meagher & Flom LLP to provide restructuring advice and a contingency plan. At this point, the board now featured a vice chairman from large equityholder, Wattles Capital Management LLC, James Marcum, who also served as the company’s CEO starting in September 2008. He was known as a turnaround guy.

With the assistance of its restructuring advisors, Mr. Marcum and the company initiated a three-pronged strategy to stem the tide; it sought to (i) restore its brand and engage in increased efforts to appeal to existing and new customers; (ii) shed unprofitable stores and layoff employees; and (iii) preserve and/or improve vendor relations. Like, seriously. That was the plan. You don’t need 20/20 hindsight to understand that that plan was BASIC AF.

Relating to the first initiative, the company focused on “elevating customer service standards in all stores,” a narrative that should strike a PTSD chord with anyone who followed the Toys R Us sh*tshow. My, things haven’t changed. It also pursued merchandising improvements, advertising and pricing initiatives…blah blah blah. As we said, BASIC AF.

Regarding its footprint, the company hired Hilco Merchant Resources LLC & Gordon Brothers Retail Partners LLC and began pre-petition store closures of 154 stores. Attendant to the store closing drive were layoffs — at least 1,300 employees. In the first instance.

Finally, the company endeavored to engage its vendors in open and honest communications relating to the results of its turnaround efforts.

Notwithstanding all of the above, the company required bankruptcy due to a liquidity crisis arising out of decreased liquidity. Seriously. The company actually said that; it noted:

In large part, a chapter 11 filing is due to three factors, all of which contributed to a liquidity crisis that prevented the Company from completing its turnaround goals outside of formal proceedings: (i) erosion of vendor confidence; (ii) decreased liquidity; and (iii) a global economic crisis.

See. We weren’t kidding.

Further explaining the factors contributing its descent into bankruptcy, the company continued:

Although the Company worked hard to preserve and, in some instances, enhance vendor relations, the Company's efforts did not instill the widespread vendor confidence the Company needed. Many of the Company's merchandise and other vendors altered their relationships with the Company to the Company's detriment. Specifically, various merchandise vendors restricted the Company's available trade credit and reduced payment terms; in some instances, the Company's terms were changed to cash in advance. These two factors alone significantly strained operations because the Company found it more difficult to sustain adequate product inventory and other store supply levels.

Hahahaha. NO SH*T THIS WOULD HAPPEN. Imagine how those discussions played out:

Circuit City: “Uh, hey guys, we’re in the middle of an operational restructuring and, uh, you know from our SEC filings that we’re publicly bleeding $400mm in cash…let’s just keep an open line of communication.”

Vendor: “Wait, seriously? F*ck you, pay me.”

Circuit City: “Haha, good one, guys. But, seriously, we just want to be open and honest with you and maybe you guys will cut us a bit of a break…?”

Vendor: “Um, no. F*ck you, pay me. Like, seriously. Pay me. Like, now. And, p.s., f*ck you.”

Now, if you know anything about how asset-based revolving credit facilities secured by inventory work, this all had the added effect of constraining availability under that facility and squeezing liquidity further.

Good thing the capital markets were open to…oh, wait. This was 2008. The company noted:

Faced with these issues, the Company also found that additional liquidity was not available through traditional channels, such as the credit markets. This was due to the widespread liquidity crisis among all major banks and other lending institutions throughout the country. Accordingly, the Company could not access additional liquidity from third party sources.

Good thing the company was focused on new advertising campaigns, merchandising improvements and the like because…oh, wait. This was 2008. The company noted:

…the Company found itself -- like all other businesses -- entrenched in the worst economic crisis since the Great Depression. As fallouts from the mortgage crisis rippled through the United States economy, the Company witnessed firsthand the significant negative effects. These effects have taken many forms, not the least of which is decreased customer traffic in stores. Simply stated, over the past several months, consumers have been unable to borrow funds through credit cards, let alone home equity loans, to purchase household and other electronics products, which had a drastic effect on sales because 75% of the Company's sales are generated through credit card purchases.

What didn’t the company blame its filing on? Best BuyAmazon. A relatively poor real estate profile. A failure to secure partnerships with Apple. The cessation of appliance sales. Neglect of gaming. But it certainly could have. After all, Best Buy managed to navigate the Great Recession fairly well.

Due to this perfect storm of events, the company filed for bankruptcy with the intention of (a) securing new credit, (b) continuing its store closures and rejecting additional unnecessary leases, and (c) working with its vendors. We all know how that played out. The company obtained “a bridge to somewhere” DIP loan ($1.1b) but, in the end, the company desperately needed a buyer to survive. But no buyers were forthcoming. Two months later the case converted to chapter 7, all 30+k employees were binned and the company liquidated.

*****

Why do we write these flashbacks? The history is important. Exactly ten years ago one of the biggest bankrupted retailers of the day was a 700-stored specialty retailer with a relatively picayune ~$900mm of funded debt. Even with all of the retrospectives relating to the 10-year anniversary of the financial crisis, there was scant discussion of the effect of the closed credit markets on businesses like Circuit City and Blockbuster Inc.

25k employees lost their jobs at Toys R Us and now Congress is all fired up. This is nothing when compared to the magnitude of Circuit City. But Toys R Us failed in boom times. This made it stick out. Circuit City…well, it was just one of many. And it was public. There were no PE overlords to blame for excessive dividends and the like.

All of which gets us to this question: what happens if the economy turns south?

Carl Quintanilla@carlquintanillaWe're going to see more retail store closures, more bankruptcies in the next two years than we've seen in the last five, says JPM's Boss, on @CNBC $RLX @SquawkStreet
Mitch Nolen Retail@mitchnolen150,000 jobs have been lost at core retail stores since peaking in January 2017, slumping to a three-and-a-half-year low. Core stores exclude "nonstores," a category that is mostly e-commerce; and non-core retail: cars, gas and building materials. https://t.co/5sjeZ40pGD

It could be an absolute and utter bloodbath.


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PETITION provides analysis and commentary about restructuring and bankruptcy. We discuss disruption, from the vantage point of the disrupted.