Circuit City Confronted By New Credit and Vendor Problems

(MoneyWatch)  Less than two weeks after reporting a $239.2 million second-quarter 2009 loss, the Washington Post is reporting that Circuit City, the consumer electronics giant, lost a recommendation from Bernard Sands, a consulting firm that sells credit and performance data to manufacturers on their retailing customers. The withdrawal by Sands signaled concerns that Circuit City may have trouble paying its vendors.

At August 31, cash on hand declined from from $297.4 million at February 29, 2008, to $92.5 million. Albeit Circuit City has $795.4 million available for borrowing under an existing credit facility, it is doubtful that the company could tap those reserves for new product purchases -- given the loss of confidence by the influential trade consultant, Bernard Sands. As articulated in Circuit City's second-quarter 10-Q regulatory filing:

• "The company understands that the decisions that its vendors make with respect to the company may depend on factors that include their specific economic situations, the company's risk profile and other factors, such as the availability of adequate credit insurance or their ability to factor their receivables from the company. At any time, a vendor could change either the availability of vendor credit to the company or other terms under which it sells to the company, or both.... Significant changes in the credit limits or payment terms that the company has with its vendors or the incurrence of additional losses beyond its current expectations, however, could adversely impact the company's liquidity."

Losing the Sands' recommendation compounds an already bleak outlook at Circuit City: in the August-quarter of fiscal 2009, comparable store sales decreased 14.4 percent, driven by a double-digit decline in traffic as compared to last year. Specifically, strong sales growth in digital television converter boxes and video gaming products were not enough to offset tepid purchases of flat panel televisions and broad-based weakness in the sale of most other categories, including camcorders, projection and tube televisions, and personal computers. With $1.5 billion of inventory sitting on store shelves, markdowns could come quicker than the day after Christmas for gift seekers.

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This post first appeared in BNET's 10-Q Detective.