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How Can RadioShack Avoid Bankruptcy?

Time may be running out for one of America's most well-known chains. RadioShack (NYSE: RSHCQ  ) , founded in 1921 by two brothers who wanted to sell equipment for the then-nascent field of amateur radio, has lost practically half its market capitalization since the beginning of the year.

It seems the company is having a hard time competing against online retailers, such as, which have a lighter cost structure since they don't need to maintain physical stores. To improve efficiency, in March RadioShack announced its plan to close up to 1,100 stores. However, the stock was down 9.5% on May 9, after the company reneged on its original plan. The recent sell-off has taken RadioShack shares near to an all-time low. Can RadioShack be saved?

Source: RadioShack

Fighting for survival
RadioShack, which in 2008 reported net sales and operating revenue of $4.81 billion, had a particularly difficult time last year, when the company announced that same store sales plunged 19%.

As revenue continues decreasing rapidly, the company decided to engage in various cost reduction measures to stop burning cash. In this context, RadioShack announced its plan to close up to 1,100 stores in the fourth quarter 2013 earnings report as a way to improve efficiency.

Can 1,100 stores be closed?
Unfortunately, it seems the company announced its store closing plan without approval from its lenders. The company's credit agreement with its lenders only allows it to close up to 200 stores per year, and up to 600 over the life of its credit agreement. 

Therefore, RadioShack will have to keep several underperforming stores open, or seek consent from creditors to proceed with its full closure plan, which is proving difficult. According to Bloomberg, the terms being offered aren't acceptable. This could be because some creditors may think that the probability of being repaid is higher if there are a greater number of stores open. 

Finally, the company could also declare bankruptcy, as a way of putting the creditors at bay. This move would allow RadioShack to close as many stores as it wants. Not surprisingly, bond and credit-default swap prices have spiked to record highs in recent weeks.

From now on
If RadioShack cannot proceed with its full closure plan, management will have to come up with different strategies to either improve revenue or reduce costs. The company, which saw a net loss of $191.4 million in its most recent quarter, has not made money in the past two years. The consumer perception of the chain is very low, and sales per quarter foot are roughly half of what Best Buy  (NYSE: BBY  )  makes.

Improving top line is a difficult task, but it is not impossible. For example, Best Buy --which has more than 1,000 stores in the U.S.-- successfully used the concept of "store within a store" to differentiate itself from online retailers. Best Buy partnered with Samsung to create the Samsung Experience Shop, a place inside Best Buy stores where customers can try Samsung's latest mobile devices. RadioShack could use the same concept to take advantage of its physical space to promote electronic brands. 

On the online front, the company could give more strenght to its trade-in program for certain gadgets, which allows customers to exchange their used electronics for RadioShack credit. 

Final Foolish takeaway
RadioShack is in a difficult situation, as it may not be able to close several underperforming stores due to various commitments with its creditors. The company could declare bankruptcy as a way of holding its creditors at bay and close as many stores as it wants. Or, it could search for additional sources of revenue. For example, it could take advantage of its physical stores to lend space to other brands and manufacturers for exhibition rooms. 

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Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On May 12, 2014, at 1:53 PM, wc4man wrote:

    They use lower price point as an excuse, ask the average RS customer why they didn't buy something it is very seldom because of price. Usually it's lack of selection if available at all. RadioShack has fallen in to the same rut most retailers have fallen into and that is lack of selection. If you need a cellular accessory fine if it's an I-Phone or a Galaxy beyond that who cares. Online might give a better price point but you have shipping many times plus a wait of sometimes several days. When I walk into any store to buy something that means I want it now not in 3 to 7 days. I know a store can't carry everything but look what others are missing out on and try to get that market and if not in store at least make it available to order to the store, I think they used to call that competing last time I checked. These are by far not the only reasons but just some off the top. RadioShack has for several years now, not just recently, tried to reinvent it's self and be current, hip, and trendy but RadioShack never was and still survived, so I say look at where you came from to see where you need to go, remember what got you to the top, It wasn't satellites, and cell phones.

  • Report this Comment On May 12, 2014, at 3:35 PM, leonardjf wrote:

    I don't see how the "store within a store"/exhibition room model is going to work for Radio Shack. According to the company's reports, the average size of its stores is only 2,500 square feet. That's not much bigger than the Samsung Experience Stores in Best Buy locations, and less than a quarter of the average size of Apple's stores. Radio Shack would only have room to show a very condensed selection of most partners' product lines, unless they turn over entire stores to a single partner.

  • Report this Comment On May 12, 2014, at 9:07 PM, bobc74 wrote:

    RS actually was a pioneer in the "store within a store concept under CEO Len Roberts back in the late 90's. They had the Sprint phone store, the Compaq computer store, the RCA Home Theater store and the MSN Internet store. They also had their own satellite TV installation company, which Len Roberts was trying to branch out to become something similar to Best Buy's Geek Squad. Unfortunately for Roberts, RS was a little to ahead of the curve there and lost a lot of money trying to make that business work. As he now sits on the JCPenny's board, I'm sure Roberts was a big reason why JCP attempted to create the store within a store atmosphere.

  • Report this Comment On May 13, 2014, at 11:17 PM, OldMonarch wrote:

    The original RS made their living on basic, obscure pieces & parts that no one else bothered to stock, before they got greedy & expanded too much & tried to go 'upscale'.

    That original market still exists!

    Go back to your roots, RS!!!

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Victoria Zhang

I'm an economist, coffee addict and value investing fan. My obsessions include fashion, online retail, traveling, disruptive technology, and Asia.

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