Things keep going from bad to worse at RadioShack Corporation (RSHCQ).
Just last week, RadioShack received a notice of default from key lenders requesting immediate payment of a $250 million term loan. To its credit, though, RadioShack's supposed default isn't exactly cut and dried; the struggling retailer quickly insisted that the notice was both "wrong and self-serving" and issued based on "unfounded technical arguments" stemming from another cash-infusing deal it announced in early October.
Worse yet, the repayment would impede its impending turnaround, which RadioShack CEO Joe Magnacca noted was about to receive a boost with additional cost-reduction measures of up to $200 million to be announced with its earnings release later this week.
But according to a recent Bloomberg report, unfortunate new details have surfaced involving at least some of those planned cost reductions.
About those benefits ...
Specifically, Bloomberg obtained an internal memo from Magnacca that says beginning Feb. 1, RadioShack intends to stop matching contributions to employees' 401(k) and 1165(e) retirement accounts. In addition, Bloomberg states, RadioShack is "reviewing" the health benefits it currently provides.
"As a result of these ongoing cost reductions," Magnacca wrote in the memo, "we are making several difficult but necessary decisions that will allow us to further contain costs and expenses."
Now, we can't exactly expect top-notch benefits from a company that's being continually threatened with insolvency and hasn't turned a profit in 10 quarters. But at the same time, RadioShack will eventually realize it's cutting to the bone as the best of its 25,000 employees jump ship. After all, there already exist many other strong retailers that thrive in no small part because they consistently provide employees with superior benefits and pay.
What now?
Then again, that's assuming those employees have stuck around as RadioShack methodically closes 200 underperforming stores per year, which is the maximum its creditors will allow per the terms of an $835 million financing package it secured just ahead of last year's holiday season. However, it's worth noting that if RadioShack had its way, it would have quickly ripped off the bandage by closing a whopping 1,100 locations. By doing so, RadioShack would have been able to bring its operating base to a more appropriate size and focus only on its best-performing stores -- a request Magnacca says RadioShack recently repeated of its lenders to no avail.
What's more, when RadioShack first trumpeted the October financing package in question, Magnacca encouragingly wrote at the time that they were in "constructive discussions" with the very lenders who are now commanding Radio Shack pay back the $250 million.
But perhaps most troubling is that if RadioShack's term lenders prevail, that repayment alone will immediately overshadow the entire $200 million the company hopes to save through the unsettling cost reduction efforts it's about to announce.
Of course, what would really help is if RadioShack showed some tangible progress in turning around its existing operations when it reports quarterly results on Thursday. Analysts, for their part, are modeling a loss of $1.01 per share as sales fall roughly 10.8% year over year to $718.4 million. In the end, if RadioShack can't live up to those low expectations, it'll be abundantly clear that the company is falling apart before our eyes.
