RadioShack’s Liquidity Looks a Little Dry

by Marc Bastow | July 12, 2013 1:44 pm

RadioShack’s Liquidity Looks a Little Dry

I’m a little bit confused at the quick rally in RadioShack (RSH[1]) this morning, as well as it’s market-stomping returns for the past year … considering the company has been in free fall for years and would seem to be lucky to finish 2014 in business.

So what gives?

If you believe RadioShack management — in the form of newly installed CEO Joseph Magnacca — the company is doing just swell.

RSH recently announced the opening of a new concept store[2] in New York City, and they have other openings planned featuring alternative stores in the NY metro area, including New Jersey, which I suspect they believe is a good thing.

However, this Thursday, media reports said RadioShack was listening to pitches from investment bankers[3] to help with its balance sheet problems, which include a repayment schedule of $216 million in convertible notes due Aug. 1. RSH shares reeled by 7% in response.

But it’s OK, says RadioShack. In a press release[4] this morning, RSH claimed it has $820 million in total liquidity available to service debt and keep the lights on at the aforementioned stores. So no big deal.

But if you believe in the real world, you might see the news differently.

First off, let’s actually give credit to RadioShack for not lying down until the reaper comes. Best Buy (BBY[5]) sees opportunity (and has seen some success already) in trying different store formats[6], and RSH might be able to strike lightning with its experiments. However, bricks and mortar cost money, so it’s worrisome when a company doesn’t have … you know, money.

There’s a reason RadioShack is talking with investment bankers: RSH is burning through cash like nobody’s business. According to its first-quarter (3/31/13) 10Q, RadioShack’s cash and equivalents dropped by about $131 million year-over-year to just around $435 million. Meanwhile, free cash flow dropped from $2 million to negative $28 million after the company bit a $43 million loss.

So where does RadioShack come up with $820 million in liquidity?

Ah, there it is: RadioShack has $385 million “remaining” availability[7] under its 2016 credit facility. However, its asset-based structure caps borrowings at $398 million, and it contains further covenant restrictions, one of which — a fixed charge coverage ratio, which takes into account lease and interest expenses compared to earnings before interest and taxes — RSH said back in March it didn’t think it could meet for “at least the next twelve months.”[8] After all, RadioShack doesn’t actually have any EBIT.

So sure, RadioShack does have some liquidity in the form of credit availability, but “availability” isn’t a sure thing.

The bottom line: Don’t just take a quick press release statement for gospel and assume all numbers don’t have any strings attached.

RadioShack is running out of cash … and time.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. RSH: http://studio-5.financialcontent.com/investplace/quote?Symbol=RSH
  2. a new concept store: http://media.radioshackcorporation.com/phoenix.zhtml?c=242236&p=irol-newsArticle&ID=1834533&highlight=
  3. RadioShack was listening to pitches from investment bankers: http://articles.chicagotribune.com/2013-07-11/business/chi-radioshack-investment-banks-20130711_1_investment-banks-7-percent-retailer
  4. a press release: http://media.radioshackcorporation.com/phoenix.zhtml?c=242236&p=irol-newsArticle&ID=1837329&highlight=
  5. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  6. in trying different store formats: http://investorplace.com/2013/07/how-is-best-buy-still-hanging-around/
  7. $385 million “remaining” availability: http://finance.yahoo.com/news/radioshack-reports-financial-results-first-103000235.html
  8. “at least the next twelve months.”: http://www.sec.gov/Archives/edgar/data/96289/000009628913000014/form10q033113.htm

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