Is This the End of RadioShack as It Drowns in Debt?

Radio Shack is in trouble. Be careful.

Jun 22, 2014 at 1:00PM

Images
Source:  Wikimedia Commons

Don't be fooled by Radio Shack's (NYSE:RSHCQ) balance sheet. Sure, its book value is a healthy-looking $0.72 per share, but have you ever tried to make your car payment by pledging your refrigerator or your TV? Unfortunately book value doesn't pay the bills, and RadioShack is running thin on what does - cash.

From riches to rags
On June 10, RadioShack reported fiscal first-quarter results. Revenue got sliced 13% to $736.7 million. Same-store sales got diced 14%. Gross profit got chopped 21% to $268.7 million. Just about the only thing that didn't get butchered was the adjusted operating loss that ballooned nearly 700% to $82 million.

Joseph C. Magnacca, CEO of RadioShack, blamed an industry-wide decline in consumer electronics demand and softness in the mobility market . He said despite the environment, the company is making progress in its turnaround efforts. Say what?

Cash is king, and the king is M.I.A.
The company ended the quarter with just $61.8 million left in cash. It does have another $361.9 million in a credit line, but is more debt the answer? RadioShack is already swimming in more than $1.2 billion in debt and short-term liabilities along with a quarterly interest expense averaging more than $13 million.

Sure, it has more than $1.3 billion in assets, but almost all of them RadioShack can't touch. For example, its inventory on its shelves has a book value of nearly $800 million. But it's not like it can liquidate it and stay in business. That's like a restaurant selling all of its food. Most, if not all, of that inventory and then some likely must stay (or be turned over through the normal cycle) and can't be turned into cash.

Radioshack

Source: Wikimedia Commons

In the last month alone, RadioShack tapped its line of credit for $35 million. This of course leaves investors to wonder if RadioShack has burnt through the $61.8 million in cash it had left already? Maybe. The press release talked about investments the company is making in 100 store remodels, and it will "leverage technology." Hey, at least they're going down with a fight.

A whole bunch of new stuff
During a conference call, RadioShack gave some details about its turnaround plans. "New categories, new brands, new products, and new private-brand innovation" were among the first things mentioned. Is it just me, or do you also see a problem with this? Hello, RadioShack, the problem is nobody is coming into your stores. You need to fix the traffic problem. Building a new product legacy is great, but it won't fix you overnight. You need help like yesterday.

RadioShack needs traffic fast, and a great marketing campaign could be the way to do it. For example, again from the conference call, the company stated that it was the first national chain to offer in-store repairs for mobile devices. That's fantastic! How come I never knew that until I listened to your conference call though? Does anybody but your investors and the few and dwindling people who still shop in your stores even know that you do this great service?

Foolish final thoughts
RadioShack's stock price has been beaten down severely, which can make it look cheap and enticing, but that can be dangerous. No matter how "cheap" a stock looks, you can lose 100% of your money whether it's at $1 or $500 initially and goes under; a total loss is a total loss. Could RadioShack turn itself around? Absolutely. But this Fool will be waiting on the sidelines until there is some hard evidence. So far all RadioShack offers is some hope that its own executives quite frankly don't even sound very enthusiastic about.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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