After 11 straight quarters of losses, RadioShack (RSH +0.00%) finds itself in desperate straits. As of Nov. 1, the electronics retailer had just $62.6 million in total liquidity, following a quarter in which overall sales fell by 16.1% and operating loss came in at $114.1 million.
Management acknowledged in September that bankruptcy was a possibility, and the stock has since fallen from $1 to under $0.50 per share. This Thursday could either mark RadioShack's day of reckoning, or it could be the beginning of a long comeback as two different creditors are presenting bailout options for the company. Oddly, RadioShack's creditors helped hastened its looming demise by preventing it from closing 1,100 underperforming stores, but now the retailer almost definitely needs emergency funding to stay afloat. Let's look at the two avenues.
The Standard General option
In October, RadioShack entered into an agreement with a group of creditors to restructure part of its debt and provide near-term liquidity. As part of that agreement, hedge fund Standard General replaced GE Capital as the lead lender and provided $120 million to RadioShack to be used as collateral for letters of credit, which retailers need to obtain inventory.
That investment will be converted to equity, giving Standard General a majority stake in the retailer, but only if RadioShack can show it has $100 million in liquidity on Jan. 15, present a plan to deliver EBTIDA of $75.4 million over the next 12 months and modify a contract with a supplier, which The Wall Street Journal reported is AT&T.
The key item there is the deadline this Thursday. If RadioShack cannot demonstrate the $100 million in liquidity then, Standard General's investment will remain as debt that the retailer must soon repay, rendering it essentially bankrupt.
Will it come up with the cash?
RadioShack finished its third quarter with $62.6 million in liquidity, so the company would have to have earned positive cash flow for the holiday quarter. Fortunately, the holiday season is the most cash-friendly to retailers as they tend to build up inventories in the previous period to prepare for the crush of shoppers during December. However, a year ago RadioShack did not benefit from this seasonality -- operating cash flow was negative $139 million owing to increasing inventories of $94 million. RadioShack also moved its fiscal calendar one month ahead this year, so its fourth quarter started in November instead of October, which could help improve those results this year.
Also in the company's favor are current industry tailwinds, including lower gas prices and a stronger job market, that lifted other retailers like J.C. Penney over the holidays. In RadioShack's third-quarter report, CEO Josepth Magnacca noted same-store sales in the company's retail segment were up 35% over the Thanksgiving weekend but said mobility sales dropped 27%.
Finally, RadioShack has made none of the gloating pre-earnings announcements heard from other retailers, which indicates its holiday performance was not strong enough to impress investors, and therefore unlikely to deliver the $38 million in positive cash flow it needs.
But wait, there's another lifeline
Yesterday, RadioShack received another bailout offer from a key lender. Salus Capital has offered the retailer $500 million in bankruptcy financing, though RadioShack has made no statement about filing for restructuring. Like Standard General's deadline, Salus' offer expires on Thursday. The loan would replace a $585 million financing package from late 2013 and would come as debtor-in-possession financing, which companies use to continue operations while in bankruptcy.
Come Thursday, it seems Radio Shack will either have to prove it has $100 million in liquidity, or accept Salus' offer, which might its best option for bankruptcy. The fact that Salus made an offer that expires on the same day as the Standard General deadline suggests Salus and Radio Shack have been in talks about a rescue, and that the retailer's holiday numbers were not good enough to secure Standard General's continued help.
Either way, all eyes will be on RadioShack this Thursday as its fate hangs in the balance.
