Tuesday, October 14, 2008

Will Circuit City go Chapter 11 next year?

Twice quotes an analyst who predicts that Circuit City will go into bankruptcy early in 2009:

“We believe a Circuit City bankruptcy has become a question of ‘when’ rather than ‘if,’” Bradley Thomas observed in a research note.

... [The analyst] said the challenging economic environment is accelerating the retailer’s trajectory toward Chapter 11, and will also diminish the likelihood that it can emerge from bankruptcy.

This is consistent with a Forbes report from a few weeks ago. After noting that CC had reported a bigger-than-expected loss and that sales were off 10%, they suggested that the Christmas season might be CC's finale if Wal-Mart decides to go in for deep discounting:

As the holiday season approaches, all industry eyes will be on Wal-Mart to see how low it sets the price bar for flat screens and other electronic toys. If the discount giant makes a Black Friday splash by advertising big screen television for as low as $599, which ARG President Britt Beemer thinks is possible, it will be a long Christmas season for Best Buy, and, potentially, a fatal one for Circuit City.

This suggests, as we've speculated before, that consumer electronics might be another category that falls victim to the Wal-Mart Corollary to the Two-Per-Channel Theory. This holds that, when Wal-Mart decides to dominate a particular category, the two survivors in that channel will be Wal-Mart and somebody else. The leading example of this has been toys, where Wal-Mart took over the top spot, leaving room for only Toys R Us to survive, while FAO Schwartz and Kaybee shrank to the role of niche players.

In consumer electronics, we've recently seen the disappearance of CompUSA and the severe downsizing of Tweeters.

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