RadioShack (RSH) has been on a bit of a roller coaster ride for the past year or so. Sales at RSH have fallen dramatically, and this has put a strain on the company’s cash flow situation. In light of these difficulties, Standard & Poor’s downgraded RSH’s debt from CCC+ to CCC in August, warning that RadioShack could default in less than a year unless its situation dramatically improves. Since that time, RSH has been trying to work out a deal to refinance its debt by the end of this year. So far, no official refinancing announcement has been made.
In the meantime, top-line revenue at RSH has continued to fall quarter after quarter, as the company has tried to move out old inventory while trying to revamp its product line. We can personally attest to the dust-covered pile of old inventory in our local RSH stores. While we commend RSH’s new management for trying to turn their stores around, it is going to be a long, expensive process that will lead to additional quarters of net losses and may never yield the desired results. Competitors like Amazon (AMZN) and Walmart (WMT) continue to chip away at RSH’s customer base, and that trend does not appear to be abating.
We anticipate RadioShack stock will drop to support at $3 in the run up to the company’s earnings announcement on Oct. 22, before the market opens — with the potential of dropping all the way to its August lows of $2.50. We also anticipate the implied volatility (IV) on RSH’s put contracts is going to continue to increase as we get closer and closer to earnings, just as it did in July, when IV climbed above 140%. This should be positive for our long put position.
Recommendation: Buy to open the RSH November 3 Puts (RSH131116P00003000)
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