RadioShack's Hail Mary Pass

The news for RadioShack  (NYSE: RSH  ) just keeps getting worse. Amid threats of being delisted from the New York Stock Exchange due to its share price falling below $1, numerous analysts have declared the electronics retailer a dead man walking. On Tuesday, the stock dropped over 10% as UBS said the company's turnaround is "highly in doubt" and Moody's said it was on track to run out of cash by October of next year. Earlier this year, creditors blocked RadioShack's plan to close 1,100 stores, and the company has just $61 million in cash on the balance sheet, with losses piling up each quarter. Suppliers and creditors are getting nervous. 

Nonetheless, CEO Joseph Magnacca is forging ahead with his plan to revamp the company, changing the model into "concept" stores, 38 of which had been open before the end of the first quarter. In the last two weeks the company has announced the opening of 44 concept stores, also known as interactive remodel stores, in the San Francisco and Washington, D.C. areas. Among other features, the new stores include a mobile device repair program called "Fix It Here!" designed to provided same-day fixes for smartphones and tablets. The company also plans to sell innovative products from start-ups and inventors through a partnership with PCH International, and installed a speaker wall, where shoppers can test out a variety of sound systems, which has helped boost sales. 

The concept stores are having early success. Addressing an otherwise disastrous first quarter, Magnacca said in a June press release, "Our concept stores continue to drive strong sales growth, and we have begun to execute our 100-store remodel program to scale the successful components of our concept stores across our network." Sales have grown in the double digits at the new stores,  but RadioShack had only opened 38 of them through the close of the first quarter, the first of which opened in July 2013 in New York. By the end of the year, the company expects to have 100 remodeled stores. 

The remodeled stores might not be enough to save the company on their own, but they could give RadioShack a lifeline in the form of a loan to keep it afloat while it converts more stores. 

Is this the end or a new beginning?
Recent employee reviews on Glassdoor.com also seem to reflect the dire situation in which the company finds itself. RadioShack has a rating of just 2.4 stars (out of a possible five) on the employer review site, and many employees complain that the company is losing talent and imposing unrealistic sales goals. Reviewers also seem aware that the company is that a potential bankruptcy is looming, creating a more negative work environment. 

Despite heavy losses on the income statement, free cash flow was nearly flat last year, at just negative $6.5 million. In the first quarter of this year, however, negative free cash flow hit $50.7 million as same-store sales dropped 14% due to poor traffic and soft mobile phone sales.

In addition to the $61 million on the balance sheet, RadioShack has a credit line of $362 million to tap, but the company will need to improve on its first-quarter results. Cash management and the success of its concept stores should be key in determining RadioShack's chances of survival. If the chain can demonstrate growth in the remodeled stores, it might convince creditors that a reborn company can survive. The market isn't betting on a recovery, as the price for credit-default swaps, which offer security for nonpayment of bonds, jumped 70% last month, and bonds that mature in 2019 are selling for just $0.42 on the dollar.

The good news for RadioShack bulls is that any sign of life should send the stock jumping. If management can show in its earnings report next month that same-store sales are coming back, that the concept store growth is strengthening, or that the financial losses are under control, the stock could begin to come back from the dead.

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  • Report this Comment On August 15, 2014, at 12:22 PM, calanus wrote:

    RS has problems. For starters, most of their stock is overpriced compared to the general market. Another problem is their heavy reliance on mobile communications devices and services - there is simply too much competition out there.

    I used to frequent RS on a regular basis to pick up electronic components. When they curtailed that and went into tech toys, I stopped dropping in. The few components they do carry are severely overpriced and very limited in scope.

    Why should I order from RS and pay full "list" plus shipping when the same (but better quality) components can be had online at a 50 - 60% discount and free shipping? Maybe if they cut staff to match customer volume, they could make their prices more competitive. When the local outlet has three staff lounging at the counter and no customers, something is very wrong, and a remodel is not going to fix it.

  • Report this Comment On September 10, 2014, at 4:48 PM, JHPrado wrote:

    Yes, it is sad that RS is going away..I built so many projects with my two sons from parts I bought at the local RS and treasure those memories. RS just went in too many directions and mastered none of them. You can't service DIYers with resistors,caps,transistors, regulators etc AND try to do RC toys, outdated home electronics, cell phones etc..It is just a bad biz model. Olsen Electronics and Lafayette Electronics also failed due to this same lack of market focus..at least RS was the last survivor!

    Good bye my old friend! You will be missed..

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