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Consumer electronics retailer Circuit City Stores Inc. filed for U.S. bankruptcy court protection Monday, forcing its Canadian division to follow suit even though it wasn't technically insolvent.
InterTan Canada Ltd., the Canadian unit that runs 772 stores under the trade name The Source by Circuit City, has been profitable, in contrast to its U.S. parent. But because the two share a credit facility, the company in Canada also had to seek — and was granted — court protection from its creditors.
The U.S. retailer will keep its stores open in both countries as it looks for potential buyers.
Industry observers said the stark contrast between the operations of the parent and Canadian divisions underlines the more severe U.S. retail environment. "There is a world of difference, in terms of how the recession is playing out currently between the marketplaces," Kaan Yigit, president of Solutions Research Group, said in an interview. "They may converge eventually, in another six months or so. But clearly the depth of the impact on the American marketplace is much deeper, and clearly if you're a retailer you're going to feel that."
About half of American households feel that the economic downturn will pinch their income over the next three to six months, while only 3 per cent of Canadian households have the same concerns, Mr. Yigit said, pointing to a recent survey by his firm.
Still, besides the different retail landscapes, the Source stores in Canada have an edge because they are much smaller than key rivals, making them more accessible, industry insiders added.
They said industry leader Best Buy Canada, which recently launched a new chain of mobile stores, may be interested in picking up some of the Source's outlets. But otherwise, potential suitors — including a possible management group — will have a tough time getting financing to buy the chain, Mr. Yigit said.
Ron Cuthbertson, president of InterTan Canada, said he's optimistic about the fate of the stores. "I am confident that we can emerge from protection with a solid future as a strong and viable company with significant growth potential," he told reporters.
NM Rothschild & Sons Canada Ltd. has been hired to look for a buyer. However, the company has been looking for suitors since 2007.
According to court filings, as of Sept. 30, InterTan had assets of about $370-million and liabilities of about $110-million, which meant it was still solvent. However, Mr. Cuthbertson said it would be insolvent if it had to tap into its credit facility.
For the second quarter ended Aug. 31, the Canadian stores had a profit of $4.9-million (U.S.), up 133 per cent from $2.1-million a year earlier, while sales rose to $147.3-million, up 11.2 per cent.
In Richmond, Va., the parent said it was filing under Chapter 11 of the U.S. Bankruptcy Code because suppliers were threatening to hold back products during the holiday shopping season.
The company, which has had only one profitable quarter in the past year, has faced significant declines in traffic and stepped-up competition from Best Buy and others. While the retail industry overall is facing what's expected to be the weakest holiday season in decades, Circuit City's struggles have intensified as anxious consumers spend less and credit becomes tighter.
Circuit City said it 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.
Mr. Cuthbertson was asked about the possibility of the parent dipping into the profitable Canadian division to cover what is needed for U.S. creditors. But he said he wasn't "prepared or qualified" to respond directly, referring the matter to the parent.
"The perspective we have is that the Canadian business unit operates independently of the parent and we work with them primarily through a shared credit facility," he said. "That credit facility is the key factor that has brought us into the [Companies' Creditors Arrangement Act]."