Time may be running out for one of America's most well-known chains. RadioShack (NASDAQOTH:RSHCQ), founded in 1921 by two brothers who wanted to sell equipment for the then-nascent field of amateur radio, has lost practically half its market capitalization since the beginning of the year.
It seems the company is having a hard time competing against online retailers, such as Amazon.com, which have a lighter cost structure since they don't need to maintain physical stores. To improve efficiency, in March RadioShack announced its plan to close up to 1,100 stores. However, the stock was down 9.5% on May 9, after the company reneged on its original plan. The recent sell-off has taken RadioShack shares near to an all-time low. Can RadioShack be saved?
Fighting for survival
RadioShack, which in 2008 reported net sales and operating revenue of $4.81 billion, had a particularly difficult time last year, when the company announced that same store sales plunged 19%.
As revenue continues decreasing rapidly, the company decided to engage in various cost reduction measures to stop burning cash. In this context, RadioShack announced its plan to close up to 1,100 stores in the fourth quarter 2013 earnings report as a way to improve efficiency.
Can 1,100 stores be closed?
Unfortunately, it seems the company announced its store closing plan without approval from its lenders. The company's credit agreement with its lenders only allows it to close up to 200 stores per year, and up to 600 over the life of its credit agreement.
Therefore, RadioShack will have to keep several underperforming stores open, or seek consent from creditors to proceed with its full closure plan, which is proving difficult. According to Bloomberg, the terms being offered aren't acceptable. This could be because some creditors may think that the probability of being repaid is higher if there are a greater number of stores open.
Finally, the company could also declare bankruptcy, as a way of putting the creditors at bay. This move would allow RadioShack to close as many stores as it wants. Not surprisingly, bond and credit-default swap prices have spiked to record highs in recent weeks.
From now on
If RadioShack cannot proceed with its full closure plan, management will have to come up with different strategies to either improve revenue or reduce costs. The company, which saw a net loss of $191.4 million in its most recent quarter, has not made money in the past two years. The consumer perception of the chain is very low, and sales per quarter foot are roughly half of what Best Buy (NYSE:BBY) makes.
Improving top line is a difficult task, but it is not impossible. For example, Best Buy --which has more than 1,000 stores in the U.S.-- successfully used the concept of "store within a store" to differentiate itself from online retailers. Best Buy partnered with Samsung to create the Samsung Experience Shop, a place inside Best Buy stores where customers can try Samsung's latest mobile devices. RadioShack could use the same concept to take advantage of its physical space to promote electronic brands.
On the online front, the company could give more strenght to its trade-in program for certain gadgets, which allows customers to exchange their used electronics for RadioShack credit.
Final Foolish takeaway
RadioShack is in a difficult situation, as it may not be able to close several underperforming stores due to various commitments with its creditors. The company could declare bankruptcy as a way of holding its creditors at bay and close as many stores as it wants. Or, it could search for additional sources of revenue. For example, it could take advantage of its physical stores to lend space to other brands and manufacturers for exhibition rooms.
Victoria Zhang has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.