Loan to Circuit City approved

Circuit City Stores Inc. got final approval for a $1.1 billion loan the same day an attorney said that in the six weeks since the retailer filed for bankruptcy, sales have dropped as much as 50 percent.

What effect that will have on the company is unclear.

The retailer was in federal bankruptcy court in Richmond yesterday for a hearing that, among other things, approved the money that would finance the company as it goes through the process.

The company also received permission from Judge Kevin R. Huennekens to void the severance agreements and employment contracts of 40 former executives, including Philip J. Schoonover, the chain's former chairman, chief executive officer and president.

Gregg M. Galardi, an attorney representing Circuit City, told the judge sales were down between 43 percent and 50 percent since it filed for protection Nov. 10.

The drop in sales at U.S. stores open at least a year -- excluding 155 stores the chain is closing -- is almost double what the chain budgeted. The company projected an average sales decline of 28 percent compared with the same time last year.

That budget, filed with the court, was based on the $1.1 billion loan the company negotiated to keep it operating through bankruptcy. It received preliminary approval to use the money Nov. 10 but was waiting on the final approval.

Concerning the sales figures, Bill Cimino, a spokesman for the Henrico County-based consumer electronics retailer, said missing the mark does not necessarily mean the company's future is in jeopardy.

"With the continued deterioration of the macroeconomic climate, results from other retailers and our operating under Chapter 11 reorganization protection, the fact that our sales are somewhat weaker than our original forecast should not be considered a negative," he said in a statement. "We are improving our gross margin rate and that is helping to offset the sales number as well as helping us manage to our debtor-in-possession budget."

But Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York retail consulting and investment-banking firm, said in an interview yesterday that the disappointing results point to Circuit City's eventual demise.

"This gets them heading right into liquidation," Davidowitz said.

Circuit City's budget anticipated paying about $44.5 million in interest and fees for the finance package through Feb. 7.

"The conditions of the [debtor-in-possession] loan and the collapsing of its customer base" make it almost impossible for the company to survive, Davidowitz said.

But Galardi, the retailer's attorney, said the chain is "building a bridge to somewhere" and remains focused on working its way out of bankruptcy, which could include selling itself.

In other developments, despite arguments from two former employees, Huennekens rejected the severance and employment contracts of the 40 executives the company had let go.

The judge, however, kept the door open for several of the former employees to file objections. The employees said they were not notified in time to hire attorneys or object to the motion.

Employees who believe they were not notified in time have until Monday to object.

Google Inc., MGM Grand Hotel & Casino, National Service Alliance Inc. and The Jefferson Hotel also had contracts voided.

Circuit City did not say in court filings how much voiding the contracts would save the company.

Contract-holders whose arrangements were erased can file claims and join the line of creditors waiting to be paid.

Also during yesterday's hearing, the judge delayed until Jan. 29 a ruling on a request to void 154 leases for stores Circuit City is closing by the end of the month.
Contact Louis Llovio at (804) 649-6348 or .