Circuit City, DHL hit by economic woes

Image: Circuit City Files For Bankruptcy Protection
Kids ride their bikes in front of an abandoned Circuit City store in Chicago.Justin Sullivan / Getty Images
/ Source: news services

The struggling U.S. economy was dealt two more blows Monday, as electronics retailer Circuit City sought bankruptcy protection and Germany's Deutsche Post AG said it would cut 9,500 U.S. jobs at its DHL unit and curtail U.S. operations.

Both companies cited stiff competition and the weak economy, which is sagging under the weight of the worst financial crisis in decades.

Circuit City Stores Inc., the nation's second-biggest electronics retailer, plans to stay open for business as the busy holiday season approaches.

The company said it decided to file for bankruptcy protection because it was facing pressure from vendors who threatened to withhold products during the holiday shopping period. It also also said it cut 700 more jobs at its headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.

Deutsche Post said that, in addition to its layoffs, it could close many of its DHL Express service centers and eliminate U.S.-only domestic express shipping by land and air by Jan. 30.

The Bonn, Germany-based company said the new round of 9,500 job cuts are on top of another 5,400 job cuts it already announced. In announcing the cuts, it blamed heavy losses at the unit, which faces stiff competition with rivals UPS Inc. and FedEx Corp. The Express unit currently employs some 18,000 workers.

The cuts are part of a wider plan to curtail operations in the U.S., though the company said its international shipping to and from the U.S. would continue. However, Deutsche Post said the U.S. remained a key market and that its other operations there, including freight, global mail and other logistics, won't be affected by the closings.

Deutsche Post's U.S. logistics unit employs more than 25,000 workers.

Deutsche Post's job cuts mark yet more bad news for American workers. On Friday, the Labor Department said the nation’s unemployment rate bolted to a 14-year high of 6.5 percent in October. That was far worse than economists expected and stark proof the economy is deteriorating at an alarmingly rapid pace.

Circuit City filed under Chapter 11 of the bankruptcy code, which will allow it to hold off creditors and continue operations while it develops a reorganization plan. Its Canadian operations also filed for similar protection.

The retailer, based in Richmond, Va., has been struggling as nervous consumers spend less and credit has become tighter, and the retail industry overall is facing what's expected to be the weakest holiday season in decades.

"This isn't a surprise," JPMorgan analyst Christopher Horvers said, adding that the reorganization could help the company get out of leases for certain bad store locations.

Circuit City, which has had only one profitable quarter in the past year, has faced significant declines in traffic and heightened competition from rival Best Buy Co. and others.

The company's biggest creditors are its vendors: Hewlett-Packard has a $118.8 million claim on Circuit City's assets, followed by Samsung ($115.9 million), Sony ($60 million), Zenith ($41.2 million), Toshiba ($17.9 million) and others. Smaller creditors include GPS navigation system maker Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.

Horvers also found it encouraging that the company was able to secure financing. Circuit City said it had lined up $1.1 billion in loans to provide working capital while it is in bankruptcy protection. That replaces a $1.3 billion asset-backed loan it had been using.

The company said in its filing that it had $3.4 billion in assets and $2.32 billion in liabilities, as of Aug. 31.

Circuit City Stores Inc. said last week it planned to close 155 of its more than 700 U.S. stores by Dec. 31. The stores are spread throughout 28 states, including multiple locations in areas like Phoenix and Atlanta. It is laying off about 17 percent of its domestic work force, which could affect up to 7,300 people.

The company also said last week that 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.

Circuit City posted a wider second-quarter loss in September with a 13 percent decline in sales at stores open at least a year. The company has been under new leadership since late September when Chief Executive Philip J. Schoonover agreed to step down. He was replaced by James A. Marcum, who is now vice chairman and acting president and chief executive.

Shares in Circuit City have traded under $1 for more than a month and the company received a warning about that last month from the New York Stock Exchange.