RadioShack Is Out of Options: Bankruptcy Looms

Troubled electronics retailer RadioShack (NYSE: RSH  ) can't seem to catch a break. After years of unsustainable losses, RadioShack announced a massive round of store closings earlier this year, a necessary step in the company's turnaround efforts. However, RadioShack's agreements with its creditors forbade such a move without approval, and the company was recently forced to renege on its plans to close over 1,000 stores, which represent around 20% of the total store base. Instead, RadioShack will close far fewer stores, as its creditors will allow a maximum of 200 store closings per year, and the company will have to attempt to cut costs in other ways.

Without the ability to close underperforming stores, bankruptcy now seems like an inevitability. In markets with competitors like Best Buy (NYSE: BBY  ) and other big-box stores, there's simply no reason for consumers to visit RadioShack stores. With the company forced to continue to operate these stores at a loss, bankruptcy may be the only option.

RadioShack is falling apart
At the end of 2012, RadioShack was still sitting on more than $500 million in cash, and while the company lost money that year, the situation didn't look nearly as dire as it does today. At the end of 2013, RadioShack had just $180 million in cash and its total debt sat at $613 million. The company's financial situation has deteriorated significantly over the past five years:

While much of the debt doesn't mature until 2019, if the current rate of cash burn continues then the company soon won't be able to afford the interest payments. RadioShack recorded a negative free cash flow of $156 million in the fourth quarter of 2013, the holiday quarter that is supposed to be a retailer's strongest. With $52 million in annual interest payments and only $180 million in cash remaining, the situation appears dire. The company does have an available credit line, but financing interest payments with more debt will only delay the inevitable.

The biggest problem is that RadioShack simply isn't selling enough stuff. The number of annual inventory turns, or the number of times per year that the company sells through its entire inventory, has been constantly declining over the past five years:

This is the reason why RadioShack desperately needs to close stores. Many locations simply aren't profitable at this level of inventory turnover, and the company has waited far too long to address the problem.

A matter of when, not if
RadioShack has run out of options. Barring a deal with its creditors, the only way that the company can close enough stores and have a chance to return to profitability is through bankruptcy. The stock may look attractive to some as a turnaround play based on an absurdly low price-to-sales ratio, but the stock price is likely on its way to zero.

RadioShack simply isn't competitive against online retailers or stores like Best Buy, and its new turnaround strategy is unlikely to work. RadioShack is trying to revitalize its image in the minds of consumers as a "neighborhood technology playground." This sounds an awful lot like the plan that Best Buy has been executing for the past year and a half, and although the results have been rocky, Best Buy has done a far better job remaining relevant than RadioShack.

Best Buy has been calling itself the "Ultimate Showroom," embracing the concept of showrooming and allowing consumers to try out and experience its full range of electronics. The store-within-a-store concepts from Samsung, Microsoft, Apple, and now Sony have been going well, at least based on the recent deals with Samsung to add 500 additional mini-stores and with Sony to open 350 mini-stores within Best Buy locations. These companies clearly see value in this strategy, and that's good news for Best Buy. 

RadioShack also appears to be attempting to embrace being a showroom, but there are a few problems with this. First, Best Buy has a far broader selection of products than RadioShack, and in markets where both stores exist, the convenience of a shorter drive to RadioShack is likely outweighed by the lack of selection. Second, RadioShack's e-commerce operation is almost non-existent. While Best Buy has been investing heavily in e-commerce, growing its online sales by over 25% during the holiday season, RadioShack doesn't even mention online sales in its quarterly reports. Being a showroom without a strong e-commerce operation doesn't make much sense.

The bottom line
RadioShack's new strategy is flawed, and the company is very rapidly running out of time and money. Without the ability to close a large number of underperforming stores, bankruptcy appears to be the only option. It's possible that a post-bankruptcy RadioShack that focuses on less-populated markets without much big-box competition could be successful, but RadioShack is not a turnaround play. Investors should steer clear.

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Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On May 15, 2014, at 7:12 PM, MightyMinnow wrote:

    The knee jerk question that pops up to me is : Why do the creditors want to weaken the company? Maybe they are looking for a one and done buyout ? The cheaper the market cap is, the more attractive the company is to a new buyer. Maybe they know someone interested?

  • Report this Comment On May 15, 2014, at 7:34 PM, bobc74 wrote:

    Inventory turn-around times have actually been decreasing since the early 2000's. I remember when I took over my first store as a store manager back in 2001. During the take over inventory, there were still some products in the store bearing the ancient "Archer" brand and a few of those didn't even have UPC codes on them from back when RS used hand-written sales tickets.

  • Report this Comment On May 15, 2014, at 7:46 PM, MightyMinnow wrote:

    My desperate small potato business experience would suggest BUYING BACK SHARES and exhausting all remaining cash. Let the strong survive day to day and let local governments close down unprofitable stores (when they get their lights turned off) for us??????

  • Report this Comment On May 16, 2014, at 11:34 AM, warrenlynn wrote:

    Here are the steps to turn Radio Shack around within 14 months:

    1. Use the current stock and advertising budget to start a Black Friday One Day Every Week sale to move popular items at a loss (50% of current street prices on 10 to 20 items) to get traffic back into the stores. Run for 1 year at least.

    2.Move non-profitable stores to within-a-store at places like Best Buy, Amazon, and Target to offer the technical items those stores do not carry. Brand recognition.

    3. Aggressively promote affiliate association with websites to sell the Radio Shack Black Friday Every Week items online and use Amazon distribution channels to speed delivery.

    4. Add educational training to the e-commerce site to provide video training on how to use the technical items in their stores.

    5.Promote "Higher Education" utilizing supplies for school projects that can not be purchased at the competition. Things like cellphone controlled app kits that provide the apps software to use with the project supply hardware.

    These are just a few ideas that could be easily implemented to turn Radio Shack around before they go into bankruptcy.

    - Warren Lynn

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