How Can RadioShack Avoid Bankruptcy?

RadioShack is trading at near-all time lows, after reneging on its plan to close up to 1,100 stores. Is now the time for investors to abandon this sinking ship?

May 12, 2014 at 1:23PM

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. 

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Victoria Zhang has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers