RadioShack (RSH +0.00%) finally got its long-awaited bailout on Friday. Last month, the struggling electronics retailer admitted that without a cash infusion, it might not make it to the end of the year. Now, two of its top shareholders are taking over its $585 million asset based credit facility and providing some extra cash to help RadioShack through the holiday season.
However, this lifeline won't keep RadioShack afloat for long. Even if RadioShack could eventually restructure into a viable business, it would probably lose more money in the next few years than the restructured company would be worth. As a result, I still believe that a bankruptcy filing is likely within the next year or so: most likely in early 2015.
The bailout arrives
RadioShack's cash infusion is coming courtesy of several investors, led by hedge funds Standard General and Litespeed Management. In taking over RadioShack's asset based credit line, they have agreed to loosen some restrictions so that RadioShack will be able to borrow more money to stock up on holiday inventory.
RadioShack's liquidity infusion will help it stock up for the holiday season (Photo: The Motley Fool)
The investors are also providing $120 million that RadioShack can use as collateral for letters of credit. Letters of credit are typically used in the retail industry to guarantee payment on inventory purchases. This liquidity infusion should get RadioShack through the next three months.
The caveats begin
After that, things get very murky. In theory, the $120 million investment will be converted into RadioShack stock, and shareholders will also have an opportunity to buy new shares of RadioShack stock.
However, for that to happen, RadioShack will need to modify a key supplier contract -- AT&T is the supplier, according to The Wall Street Journal -- maintain at least $100 million of liquidity as of Jan. 15, 2015, and come up with a viable business plan for next year. Additionally, RadioShack will need to refinance the $585 million credit facility by next March.
The big problem
Even assuming that RadioShack meets the first two requirements (and there's no assurance that it will), it will be hard-pressed to come up with a viable business plan for next year. Earlier this year, RadioShack wanted to close up to 1,100 stores, but its secured lenders vetoed the plan.
It seems clear that RadioShack needs to close a lot of stores to stem its losses. However, it still needs to come to agreement with its secured lenders (led by Salus Capital Partners) to do so, and this hasn't happened yet.
Moreover, RadioShack's business has been fading fast. Comparable-store sales declined 16.9% in the first half of fiscal year 2015, and the company posted an adjusted loss of $200.8 million for that period: up from an $89.4 million adjusted loss in the comparable period last year.
RadioShack is struggling with low demand for many of its legacy offerings (Photo: The Motley Fool)
This suggests that even closing 1,100 stores won't be a complete fix. Operating expenses have recently run at a rate of approximately $1.4 billion annually. Even if RadioShack were to cut operating expenses by 20% through store consolidation and revenue stayed flat, it still probably wouldn't reach breakeven.
Furthermore, closing stores will have an impact on revenue. Other chains implementing store consolidation generally assume that only 20%-30% of the sales from locations that close will be transferred to the remaining stores.
As a result, even if the lowest-performing locations are closed, the impact of lost sales will offset more than half of the cost savings from store closures. Thus, only a broader upturn in RadioShack's sales trends -- combined with store consolidation and reduced overhead costs -- can make the RadioShack business viable.
Time is still short
At the end of 2013, RadioShack had $179.8 million in cash, and had used $55 million of its credit facility for letters of credit. By early August, it was down to just $30.5 million in cash and was using $132.4 million of its credit facility. In other words, in the intervening seven months, RadioShack had burned through about $227 million of liquidity.
Furthermore, RadioShack's liquidity had fallen to less than $100 million by the time it agreed to its cash infusion. This means it has burned through another $100 million or so in the last two months.
In this context, RadioShack's plans to raise $120 million from its top investors and up to $120 million from other shareholders clearly doesn't constitute a long-term solution. Even assuming that RadioShack's losses moderate somewhat next year, the company could still burn through all of this cash in the next 12 months.
Given these bleak prospects, there is a significant likelihood that Standard General and Litespeed won't opt to convert their $120 million investment into equity. In this case, RadioShack will have to repay the hedge funds early next year, which would virtually force a bankruptcy filing.
In essence, RadioShack's top investors are giving the company a short-term lifeline to see if it can make a big leap forward during the holiday season. Barring a miraculous turnaround in the next 3-4 months, RadioShack is still headed for bankruptcy. Investors should stay away.
