Circuit City forced into Chapter 11 protection

Circuit City filed for bankruptcy protection on Monday, providing the clearest indication yet that the all-important holiday shopping season could be filled with static for consumer electronics retailers.

Circuit City filed for bankruptcy protection on Monday, providing the clearest indication yet that the all-important holiday shopping season could be filled with static for consumer electronics retailers.

The No. 2 electronics chain, which has struggled for at least two years to keep up with intensifying competition from industry leader Best Buy and retail colossus Wal-Mart, says that most consumers won't be affected: It plans to remain in business, honor gift cards and handle returns and exchanges.

But Circuit City says that it had to reassure vendors that they would be paid for the TVs, computers and other products that the chain needs in the year's key sales season. It says that many started to withhold credit last week after Circuit City said that it will close 155 of its 721 U.S. stores to cut costs as the economy deteriorated.

The Chapter 11 bankruptcy-protection filing enabled the company to secure $1.1 billion in financing, and could help it to get out of some lease commitments.

That "should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively," acting CEO James Marcum said in a statement.

Circuit City owes more than $1 billion to more than 100,000 creditors led by Hewlett-Packard, Samsung and Sony, according to its filing with the U.S. Bankruptcy Court in eastern Virginia.

Several analysts remain skeptical about Circuit City's prospects in a year that has already proved treacherous for electronics retailers, including CompUSA, Tweeter and Sharper Image.

"The biggest issue is their real estate," says Stacey Widlitz at Pali Research. "They probably need to close an additional 100 stores."

The chain also has to distinguish itself in a business where it's hard to make a profit on big attractions such as TVs and computers. Best Buy, for example, excels at packaging electronics with high-margin accessories, including cables, warranties and software, says Bernstein Research analyst Colin McGranahan.

"And Wal-Mart looks at consumer electronics as a great category to get you into the store," he adds. "If they don't make much money on it, they don't care, because now they can sell you Pampers and Cheerios and Clorox — all the things they do make money on."

Circuit City shares plummeted 60%, to 10 cents, before trading was halted. Two years ago, the shares sold for about $25.

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