Circuit City Stores Inc. said Monday it is closing about 20 percent of its U.S. stores — cutting thousands of jobs — in an effort to return to profitability as it finds consumers reluctant to spend and its vendors less eager to give it credit.
The nation’s No. 2 consumer electronics retailer said it will shut 155 of its more than 700 stores and leave at least a dozen markets entirely, including Phoenix and Atlanta, by Dec. 31. It will lay off about 17 percent of its domestic work force, which could affect up to 7,300 people.
Circuit City also said it will further cut back on new store openings and plans to work with landlords to renegotiate leases, lower rent or terminate agreements while it deals with tightening credit from its vendors.
The moves renewed the specter of bankruptcy hanging over the Richmond, Va.-based company as it heads into a holiday shopping season that could determine its future, amid slower consumer spending that has even the least vulnerable retailers worried.
“The weakened environment has resulted in a slowdown of consumer spending, further impacting our business as well as the business of our vendors,” James A. Marcum, vice chairman and acting president and chief executive said in a statement. “The combination of these trends has strained severely our working capital and liquidity.”
Marcum called the decision to close stores “difficult, but necessary.”
Based on nearly 43,000 employees as of Feb. 29, 17 percent could be up to about 7,300 workers. But the company said the number would likely be lower in part because employees in some markets may become employed at other stores. It would not give further details.
Circuit City shares, which have traded under $1 for more than a month, rose 10 cents, or about 40 percent, to 36 cents in midday trading Monday.
The company said it expects the stores it is shuttering, which generated about $1.4 billion in net sales in fiscal 2008, will not open on Tuesday and store closing sales will begin Wednesday.
Circuit City spokesman Bill Cimino said the decision to pull out of 12 markets was based on store performance.
“There are some markets where we have more competitors, there are some markets where we have less competitors, in all, we’re closing 155 stores that were underperforming,” Cimino said.
Circuit City also noted restrictive actions taken by its vendors, including limiting credit for purchases. The company said it is working to secure support from vendors, but the “current mix of terms and credit availability is becoming unmanageable.”
It also said it has been unable to collect an income tax refund of about $80 million that Circuit City believes it is owed from the federal government.
Standard & Poor’s Equity Research analyst Michael Souers told investors that Circuit City’s decision was “rational and necessary to attempt to conserve capital,” but said restrictive measures by some vendors may “ultimately prove too challenging.”
“We think there is a fair chance (Circuit City) will be forced to file for Chapter 11” bankruptcy protection, Souers wrote.
The company has had only one profitable quarter in the past year, posting a wider second-quarter loss in September with a 13 percent decline in sales at stores open at least a year. Its results have weakened as the company faces significant declines in traffic, heightened competition from rival Best Buy Co. and others and a weakened brand position.
Circuit City, which is exploring strategic alternatives, has also been working with advisers to determine how to substantially improve its operating and financial performance.
The company said last week it received a warning from the New York Stock Exchange that its stock price is not high enough for continued listing. The NYSE said the shares had an average closing price of less than $1 over 30 consecutive trading days as of Oct. 22, falling short of the exchange’s requirement. Its shares have closed under a dollar since Sept. 30, when they fell to 76 cents. Shares have traded between 17 cents and $8.24 in the last year.
In order to regain compliance with the NYSE, Circuit City’s common stock share price and the average share price over a consecutive 30-trading-day period must both exceed $1 within six months of it receiving the notice.
A major Circuit City shareholder — Classic Fund Management AG, a Liechtenstein-based asset management company — also said last week that it cut its holdings to 8.2 million shares, or about 4.8 percent of the company, from 9.5 million shares, or 5.6 percent.
Circuit City has been under new leadership since late September when Chief Executive Philip J. Schoonover agreed to step down. He was replaced by Marcum.