by Marc Bastow | July 26, 2012 6:15 am
The world of brick-and-mortar retail was taken down another notch Wednesday. And at a glance, it might even be in danger of losing another player.
RadioShack (NYSE:RSH) announced a shockingly steep loss for the second quarter and — perhaps more ominously — suspended its 12-cent quarterly dividend, sending shares hurtling by roughly 30%. At around $2.50 per share, RSH is plumbing depths last seen in the early ’80s.
It’s safe to say things are not going according to plan.
RadioShack hitched its wagon to the star of wireless and mobile handset sales, both in its own locations and through an in-store arrangement with Target (NYSE:TGT). Some of us — including me — thought the strategy might help them turn a corner.
Well, sales of wireless plans are going up. But RadioShack also is facing a squeeze on profit margins that it will be hard-pressed to absorb. Second-quarter gross margin was 37.8% compared with nearly 46% for the year prior, leading to a $21 million loss against last year’s $25 million profit.
All this despite a rise in sales to $953 million, which, while missing analyst estimates of $970 million, still was up about 2% from the year-ago period.
What’s going on? Well, margins on Apple (NASDAQ:AAPL) iPhones generally lower are than those running Google‘s (NASDAQ:GOOG) Android, and although Apple’s most recent results suggest slowing sales in the iPhone space, customers still are eager to own them — to the tune of 26 million sold in the second quarter. The sales mix — including those from the kiosks in the Target stores — makes for a poor twist of fate, putting the screws to anyone hocking iPhones.
The same is true for telecoms with direct retail like Verizon (NYSE:VZ) and AT&T (NYSE:T), except they have a lot more room for margin error.
RadioShack’s implosion now begs the question: What’s the over-under on a Chapter 11 filing?
It’s all about cash, baby. And while RadioShack isn’t going to run out of that right away, the company needs a plan, and soon.
The quarterly loss cut first-half cash flow down to $23 million from last year’s $101 million. Take out capital expenditures, and cash flow goes negative. The balance sheet is worsening, as long-term debt increased nearly $10 million, and $375 million in long-term debt comes due in next August.
The good news? Suspending the dividend is a quick way to save about $50 million per year, and the company is hoping to refinance (restructure?) based on the savings. The company is sitting on more than $500 million in cash and — well, that might be all for now.
Thus, as bad as everything looks right now, I don’t necessarily expect that bankruptcy filing anytime soon. Again, sales actually were up, and the kiosk tie-in with Target appears viable. What might have to happen is a negotiation of pricing strategy — and that could be the pivot point on which the future rests.
I suspect that point might be no more than 12 months from now.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long VZ and AAPL.
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