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For Circuit City, holidays not looking happy

The looming holiday sales period is likely to sort out the electronics retailer's future.

While many retailers are understandably nervous about what this holiday will bring, none is likely more so than Circuit City.

Blockbuster rescinded an offer to buy the beleaguered chain earlier this year and its CEO stepped down in September. Its stock has been languishing below $1 for long enough that the company has been notified it could be delisted from the New York Stock Exchange. And now the company has been forced to close 155 stores right before the crucial holiday sales period because of the dearth of credit available in the market right now.

Circuit City
Circuit City

For all intents and purposes, it appears the nation's second-largest electronics retailer is on the verge of disaster. Even if this season's sales results end up not being as bleak as some are predicting, it's unlikely even that could save Circuit City at this point. Circuit City did not respond to a request for comment for this article.

Though Wall Street analysts who watch Circuit City closest aren't ready to go on record to go on a death watch for the electronics chain, suffice it to say, its pulse is getting weaker and things aren't looking good.

The global credit crunch is hurting Circuit City in particular. The retailer buys TVs, stereos, laptops, and other gadgets on credit, usually at a good rate from vendors with the promise to pay it back once the company sells the goods in its stores. But as the company has racked up huge losses, vendors are not giving Circuit City reasonable financing rates. Though Circuit City hasn't come out and said so, some vendors could be convinced altogether that the retailer flat out won't be able to pay the money back and could decline to send Circuit City any products at all. At that point, it becomes almost impossible for Circuit City to operate.

Because of this, the business model of Circuit City and other electronics retailers doesn't work without very fast growth. And sales of many of the big-ticket items like notebooks, flat-panel TVs, and even gaming consoles (it's the first year in awhile there won't be a hot, new, hard-to-get console), are tapering off.

No doubt, the slumping economy is causing some consumers to be more conservative about purchases this year. Consumers polled by the Consumer Electronics Association say they plan to spend $200 less this year than last on holiday items.

Add to that a fundamental shift in the way media is consumed--more online video and digital downloads, slowly moving away from packaged media and accompanying players--and the future of the electronics retail business doesn't look so bright. As prices drop, it gets harder to grow business. And without that growth, it's impossible for Circuit City to pay back those loans, much less suddenly become profitable, said one analyst who asked not to be quoted.

In the meantime, Circuit City is closing some stores and renegotiating lease terms on some of its store locations. Shutting the stores will save money in the long run, but the company needs cash and especially credit now.

Liquidating those stores, or selling all of the products in those stores at closeout prices to a liquidating company, should bring in some fast cash. However, Circuit City still has to pay the vendors for their product. Without some sort of margin on the liquidated product, it's unlikely the liquidation will have any immediate positive impact on the company's current financial plight. If the company doesn't bring in a decent profit this holiday, 2009 could bring about bankruptcy for the chain.

Circuit City is, of course, not alone in its struggle to keep up with the changing retail electronics business. Specialty electronics retailer Tweeter succumbed last week, and in early December last year--right in the midst of the crucial holiday season--CompUSA announced it was closing up shop.

Buying a lot of products on credit up front means retailers are stuck with paying the bill even if consumers don't buy the products at the price they paid. As a result, retail isn't a particularly forgiving business for anyone even if they make one mistake, said Stephen Baker, who follows the retail electronics business for the NPD Group.

"The supply chain and the way (products) go to market continues to reinvent itself. It puts more pressure on retailers," he said. "And they have the least flexibility and are culturally the most resistant to change."