This is supposed to be a good thing: Electronics retailer RadioShack (NASDAQOTH:RSHCQ) is said to have lenders lining up at its door offering it new financing, a move that will shore up deteriorating vendor confidence. I say it heralds the beginning of the end.
The struggling company is in the midst of a long-term turnaround plan that CEO Joe Magnacca says is already starting to bear fruit. For the first time in about three years, RadioShack recorded its first rise in same-store sales, though that came at the expense of profit margins.
Partly as a result of dumping "unproductive" inventory (i.e., stuff no one wants to buy) and highly promotional activity, RadioShack saw gross profits fall 7.6% to $314 million, continuing operation losses triple, and net losses widen 150% from the year-ago period. It admits results are going to be lumpy quarter to quarter as it tries out different scenarios, but as it searches for that perfect pitch to the consumer, its financial condition worsens.
Which is why the new financing is seen as key to tamping down worries, though it's reasonable to ask that if an already highly levered firm was having trouble making ends meet, what makes anyone think heaping even more debt onto its shoulders -- even if it comes with lower interest rates -- would be life-affirming to its vendors?
It seems current lenders Bank of America and Wells Fargo, which have been identified as among those willing to lend RadioShack more money -- JPMorgan Chase and GE's credit unit are another two -- could be worried it will run short of cash.
RadioShack used some $213 million of the cash it had on hand to pay down debt in August, with nearly a like amount left plus an additional $385 million on a secured credit facility. But sales continue to fall and there's nothing to suggest it's really getting better. The company was putting a lot of stuff on sale to attract customers, and while they responded, it doesn't mean they'll come back after the sales are over. The Shack's been burning through cash and getting down to the point where it will need to tap its revolver to finance itself soon, which is never a good position to be in and one that can't sustain itself very long.
There are bound to be apt comparisons to its much larger electronics rival Best Buy (NYSE:BBY), which was also done in by the rise of the Internet, the advent of Amazon.com, and the blossoming of showrooming, which allowed shoppers to use the brick-and-mortar stores to test out electronic goods and then buy them online, often cheaper.
Best Buy is also attempting a U-turn, having similarly revamped itself to promote smartphone sales, but there's only so far that can carry a retailer, and RadioShack is seemingly running into that wall: Mobility segment sales fell almost 1% this past quarter and are down 4.5% over the first six months of the year.
With layoffs still being executed, its CFO jumping ship for Planet Fitness, and a heavy debt load that has Standard & Poor's still worried about a default risk, there's just no way this refi news is good, despite the spin being accorded it.
I still think RadioShack's days are numbered, which is unfortunate since I do use the local store for esoteric odds and ends I need for projects. Shares may have rebounded during the summer, but they've been tumbling hard lately, and I believe investors would be wise to tune out this turnaround.