by Paul Moore, Contributing Editor & Technology Specialist, Smart Profits Report

So China has become the latest country to pump up its laboring economy, with a whopping $585 billion stimulus package.

Whether it works or not… time will tell. But Asian and European stocks picked up on the move on Monday, grasping onto whatever seemingly positive moves they can.

Here in the U.S., the mess continues unabated. The government had to reshape its bailout for AIG, including forking over an extra $40 billion. But despite the floundering company’s fourth consecutive negative quarterly report, the markets reacted positively to the story.

That didn’t help avert the crisis other areas, as Detroit’s automakers repeated their increasingly desperate pleas for some financial muscle and Circuit City (NYSE: CC) filing for Chapter 11 bankruptcy in order to seek protection from its creditors.

This came just a week after the electronics giant announced that it will close 155 of its 1500 stores. No wonder investors aren’t showing any confidence in the markets.

The fact that a mismanaged institution like Circuit City would declare bankruptcy wouldn’t be all that disconcerting at most times of the year. But when it’s right before Christmas…

However, this news might not be as bad as it seems. Smart investors know that Circuit City is an anomaly rather than a harbinger of the retail sector’s future…

Black Friday Or Red?

Black Friday – the traditional post-Thanksgiving excuse to shop until you drop – is only a couple of weeks away. Retailers like Circuit City, which depend on the holiday season for the bulk of its annual revenues, typically capitalize on the bargain-buying hordes in a number of ways. First, it opens the doors before the birds have started their early morning wake-up call and offers free prizes for the first few customers.

Even mismanaged companies can breathe a sigh of relief during holiday season, as they know exactly what to expect: Customers and cash.

But Christmas isn’t coming early for Circuit City. Not when Hewlett-Packard (NYSE: HPQ) and Samsung reduced or canceled its lines of credit at the very time when the retailer needed it the most. Sony (NYSE: SNE) even went as far as stopping delivery trucks in transit.

Why Circuit City Can’t Compete With The Big Boys

Take a look at the chart of the three-month LIBOR trend below. It indicates that the credit markets are beginning to loosen. The cost of inter-bank lending appears to have peaked on October 8 at just under 5.4% and has trended downward since.

As far as Circuit City is concerned, its pressing need for cash unfortunately happened to coincide with the credit crisis, and peaked shortly after LIBOR began to fall.

The threat of liabilities off the balance sheet has haunted both the company and its creditors for some time now. Circuit City is tied into multi-year leases that resulted in $116 million worth of termination cost liabilities as of August 31. And last week’s announcement of 155 store closures will probably account for $183 million more.

Even if the company were able to liquidate everything, the liability related to closing stores would be devastating, as the firm’s 1,500 locations are reduced. How many other companies can say they share those same sad stats?

In A Changing World, Circuit City Lacks Foresight

To top it all off, Circuit City showed a fatal inability to evolve with its industry.

Over the past few years, the Apple (Nasdaq: AAPL) database has emerged as the central point for music purchasing, edging out the previously popular CD. And folks who still like CDs usually rely on Wal-Mart (NYSE WMT) and Internet retailers such as Tigerdirect and Buy.com, which offer lower prices compared to, say… Circuit City.

Cast the financial aspect aside for a second and chief competitor, Best Buy (NYSE: BBY) offers enviable customer service in its Geek Squad and personal shoppers. By contrast, Circuit City didn’t have the capital to capture the high-end of the market and, with pricing pressured at the low-end, the firm has quite simply languished until its cash reserves have disappeared.

Sure, the credit crisis didn’t help. But Circuit City can only blame it as a catalyst and not as a primary reason, since it’s been losing ground to Internet companies ever since iTunes made its debut.

Circuit City Had It Coming… But Its Main Rival Should Benefit

So at the risk of sounding blunt, Circuit City had this Chapter 11 coming. It’s simply a logical conclusion to six months of trouble, in which the company had to cut its dividend, lost an opportunity to be acquired due to lack of disclosure, and put plans for a new distribution facility on hold.

In this gloomy economic environment, most onlookers may see Circuit City as a prime example of what is going to happen to the rest of the retail sector, as we slide further into a recession. And with the critical holiday season around the corner, who can blame them?

A closer look, however, shows that while those fears are understandable, they’re not well-grounded. For some retailers like Best Buy, which will undoubtedly benefit from consumers not wanting to buy gift cards and extended warranties from Circuit City, this may actually be the end of the beginning rather than the beginning of the end.

Paul Moore
Smart Profits Report