NEW YORK - Circuit City Stores Inc., America's second-biggest electronics retailer, and its Canadian subsidiary have filed for bankruptcy protection but both plan to stay open for the holiday shopping season.
Circuit City filed under Chapter 11 of the U.S. bankruptcy code, and its wholly owned InterTan Canada subsidiary -- which operates as The Source by Circuit City -- said it is filing under the Companies' Creditors Arrangement Act.
The court shelter will allow the company to hold off creditors and continue operations while it develops a reorganization plan.
The Richmond, Va.-based retailer has been struggling in the United States as anxious consumers spend less and credit tightens. The Canadian operations aren't under as much economic stress.
InterTan president Ron Cuthbertson told reporters Monday that the Canadian stores have been delivering stable or improving financial results but was required to seek court protection when its parent did.
The two companies share a credit facility, which provides the cash needed to fund day-to-day operations.
"The Canadian division needs the credit facility to remain solvent and pay its creditors," Cuthbertson said in a conference call.
"Should our credit note be called, and we have to be able to fund that immediately, we do not have the means to do that, which would bring us to insolvency."
However, the intent of Chapter 11 and CCAA is to allow companies to keep operating while they work out an acceptable arrangement with their creditors -- lenders, landlords, suppliers and the like.
Circuit City said it has negotiated a US$1.1-billion debtor-in-possession credit facility which will enable it "to pay vendors and other business partners for goods and services provided after the filing."
That replaces a $1.3 billion asset-backed loan it had been using.
Cuthbertson said InterTan's business model in Canada is considerably different -- much smaller stores, each with less inventory -- and has performed "quite well, financially."
InterTan had annual revenue of about $650 million, had a profit of US$4.9 million in the quarter ended Aug. 31, up 133 per cent from a year earlier as sales grew 11.2 per cent.
"That has been allowing us to work with our vendors very well," Cuthbertson said.
He wouldn't rule out the Canadian subsidiary being sold or spun off in a management-led buyout but and said if the court-supervised restructuring succeeds "we anticipate strong performance in the future, whether our parent is directly tied to us or not."
The U.S. retail industry overall is facing what's expected to be the weakest holiday season in decades.
Some major Canadian retailers have said recently that they're confident that they will do better than their American counterparts, at least until the end of 2008.
Circuit City said Monday it will cut 700 more jobs. Last week, it announced the planned closure of 155 of its 700-plus U.S. stores by Dec. 31, while laying off about 17 per cent of its American workforce -- up to 7,300 people.
InterTan, which employs 3,000 to 3,100 people in its 500 corporate stores across Canada and head office in Barrie, Ont., doesn't expect to close locations or cut staff because of the restructuring but will continue, as always, to reassess its locations on an ongoing basis, Cuthbertson.
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. It said it decided to file for bankruptcy protection because of pressure from vendors who threatened to withhold products during the holiday season.
"This isn't a surprise," said JPMorgan analyst Christopher Horvers.
"At the end of the day I think it's really about an inventory position," Horvers said. "If they can get inventory into the stores, I can think they'll remain competitive."
John Penn, a partner at Haynes & Boone, said it was "quite an achievement" for Circuit City to arrange US$1.1 billion of debtor-in-possession financing in the current market.
"With the news of the cuts last week -- and vendors wanting to know they can get paid -- having a recognizable source like a DIP can calm a lot of vendor concerns."
Circuit City's biggest creditors are Hewlett-Packard, which has a US$118.8-million claim, followed by Samsung (US$115.9 million), Sony (US$60 million), Zenith (US$41.2 million), Toshiba (US$17.9 million) and others including Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.
The parent company said in its filing that it had $3.4 billion in assets and $2.32 billion in liabilities as of Aug. 31.
In Canada, InterTan said its stores "will remain open for business, fully staffed and the company intends to honour all customer programs such as returns, exchanges, warranties and gift cards."
