In September, RadioShack Corporation (NASDAQOTH:RSHCQ) warned investors that without a cash infusion, it might not have enough cash to get through the holiday season. The following month, it got a bailout of sorts from one of its biggest investors, hedge fund Standard General.
But RadioShack still needs to get its house in order by early 2015 to avoid bankruptcy. While RadioShack has made some progress in turning its business around -- primarily through drastic cost cuts -- its financial position is probably too tenuous to avoid a bankruptcy filing. The real question now is whether it will be able to avoid liquidation.
Earnings and cash flow keep falling
In Q3, RadioShack's comparable store sales fell 13.4%, leading to an adjusted loss from continuing operations of $125.3 million. That was even worse than the $91.1 million adjusted loss from continuing operations that RadioShack posted in the same quarter last year.
RadioShack's cash position also became dire during the quarter as it ended Q3 with total liquidity of just $62.6 million, down from $182.5 million at the end of Q2 and $423.7 million at the end of Q1.
Lifeline in jeopardy
In October, Standard General and Litespeed Management provided $120 million to be used as collateral for RadioShack to keep store shelves stocked through Christmas. The two firms will convert that $120 million to stock in early 2015 -- thereby keeping RadioShack solvent -- but only if a few conditions are met.
RadioShack must: 1) renegotiate a key supplier contract that is expiring this month on equal or better terms; 2) maintain at least $100 million in liquidity as of January 15, 2015; and 3) create a viable business plan to produce at least $71.4 million in earnings before interest, taxes, depreciation, and amortization next year.
There is no guarantee that RadioShack will meet any of these conditions -- let alone all of them. First, it has not managed to renegotiate the key supplier contract yet, and it now has less than a month left to do so. Given RadioShack's precarious financial position, suppliers are probably wary of doing business with it.
Second, RadioShack was well short of the $100 million liquidity target as of early November. Typically, this wouldn't be a problem because most retailers produce strong cash flow in Q4 as they sell their holiday inventory. However, RadioShack actually burned cash during the holiday quarter last year. (The figures are not quite comparable, though, due to a change in RadioShack's financial calendar.)
Third, RadioShack may not be able to present a business plan for next year that meets the hedge funds' requirements. Last week, RadioShack revealed a plan to cut nearly $400 million of costs. That would get it very close to the minimum EBITDA of $71.4 million required to trigger a conversion of the $120 million investment to stock and avoid a default.
The viability of that business plan is unclear, though. It includes slashing marketing spending to the bone to save $105 million. In the past few weeks, RadioShack has reportedly seen no impact from reducing ad spending, but in the long run it will be hard to keep customer traffic up with a razor thin marketing budget.
The business plan also includes $90 million in savings from store closures. That requires the consent of another lender -- one that has vehemently opposed additional store closures for the past 9 months. Lastly, RadioShack is cutting employee benefits to save money. That could further sap employee morale, ultimately hurting sales.
Not many moves left to make
RadioShack's management team is doing everything it can to keep the company afloat. There have even been patches of good news, such as strong sales in the non-mobility part of the business over Thanksgiving weekend. Nevertheless, it's a long shot for RadioShack to fulfill all the conditions that the hedge funds set as part of their investment agreement.
RadioShack's bankruptcy is almost a self-fulfilling prophecy at this point. The company needs the cooperation of its lenders and suppliers to avoid defaulting on the loans now held by Standard General and Litespeed. Yet lenders and suppliers are more worried than ever about RadioShack's solvency, so they are unwilling to stick their necks out for the company.
Barring a miraculous performance in December, RadioShack is likely to file for bankruptcy in early 2015. If it can produce a plausible business plan, it might be able to reorganize as a much smaller, more focused company. If not, RadioShack could be just a memory by this time next year.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.