Chief Executive Officer Joe Magnacca tried to reassure investors that the poor performance was attributable to one-time factors like carrier promotions that weren't available through retailers. He also described various changes such as remodeling some locations, rolling out an in-store mobile device repair program, and adding new unique products through partnerships with start-up incubators.
However, these are finesse moves in the context of massive problems. It's like rearranging the deck chairs on the Titanic -- things may look prettier for a while, but there's an iceberg ahead. RadioShack is likely to hit a severe liquidity crisis in the next year or so due to ongoing competition from the likes of Apple (NASDAQ: AAPL ) and Best Buy (NYSE: BBY ) . Its chances of avoiding bankruptcy are now slim indeed.
The bleeding gets worse
After losing $400 million in 2013, RadioShack lost another $98.3 million last quarter, which is equivalent to $0.97 per share ($0.98 per share if adjusted to exclude one-time gains and losses). That was nearly twice as big a loss as analysts had expected. The poor results were primarily driven by a double-digit decline in comparable-store sales.
As a result of these poor operating results, RadioShack's cash on hand plummeted from $179.8 million at the end of December to just $61.8 million by early May. That left RadioShack with total liquidity of just $424 million, and this is expected to contract further in the next couple of quarters. The company recently borrowed $35 million from its credit line to ensure that it can keep paying its bills (for now).
A turnaround that's too slow
RadioShack is implementing some interesting new initiatives to try to diversify beyond selling smartphones and related accessories. Whereas top rival Best Buy complained recently about a lack of innovation at key vendors like Apple and Samsung, RadioShack is trying to work more proactively to drive innovation by partnering with inventors and startup accelerators.
However, this is the type of business "pivot" that will take years -- not months -- to really gain traction. Unfortunately, RadioShack doesn't have that kind of time, at least not without filing bankruptcy to gain protection from its creditors.
In the near term, RadioShack's business will continue to be dominated by sales of smartphones and related accessories. With no major smartphone releases expected this summer, RadioShack will have to get through at least one more tough quarter before Apple rolls out its iPhone 6 this fall.
New smartphones to the rescue? (Not so fast!)
Bulls might take solace in the fact that a new iPhone is headed to market soon. Indeed, Apple's iPhone 6 is likely to have a bigger screen size (or a choice of two bigger screen sizes) and it should therefore drive a strong upgrade cycle.
However, RadioShack is just one of many places where you can get an iPhone. Furthermore, RadioShack's main value proposition compared to other smartphone resellers is the technical knowledge of its staff -- but Apple has its own stores for that. RadioShack has a similar issue for selling Samsung phones, because Best Buy has "Samsung Experience Shops" with dedicated Samsung experts in most of its stores.
Even if RadioShack gets a sales lift from Apple's iPhone launch, that won't fix its problems. First, third-party retailers earn very low margins on the sale of Apple hardware. Second, if the customers buying iPhones at RadioShack opt for subsidized phone plans, RadioShack will face a severe hit to its cash flow.
The problem is that RadioShack might pay Apple close to $600 for an iPhone and then sell it for $199 on a subsidized plan. It eventually gets another $450 in "subsidy" from the wireless carrier, allowing it to recoup its costs and earn a profit. However, it could take months for that money to arrive.
Declining mobile sales helped RadioShack reduce its accounts receivable balance by more than $240 million last year, benefiting its cash flow. A smartphone sales rebound could cause that to reverse. RadioShack would then have hundreds of millions of dollars tied up in accounts receivable, accelerating its looming liquidity crisis.
Foolish bottom line
RadioShack's business has been decimated by its reliance on declining consumer electronics categories and its former strategy to pin all of its growth hopes on mobile. The recent slowdown in smartphone sales has shown conclusively that this was a giant blunder. Competitors like Best Buy are suffering from similar trends.
While CEO Magnacca has some interesting ideas for how to refresh RadioShack's product assortment, initiatives along these lines won't provide the immediate revenue boost needed to stave off a liquidity crisis. By the end of this year, ongoing operating losses and the cash flow impact of a new iPhone product cycle will push RadioShack to the brink of bankruptcy. In all likelihood, it will topple over the edge before long.
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