Why RadioShack Stock May Be a Lost Cause

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At the end of August, shares of struggling electronics retailer RadioShack (RSH) soared on whispers that it was possibly getting a much-needed $25 million cash lifeline from hedge fund Standard General. With only a little more than $30 million in the bank and quarterly losses now totaling more than $100 million, it wasn’t clear if the company would be able to continue functioning through the end of the year without the money.

radioshack stockAll told, RSH rallied 130% on the heels of the encouraging news, making RadioShack stock an interesting speculation once again.

As it turns out, though unbeknownst at the time, that $25 million wouldn’t be the biggest offer cash-strapped RadioShack would be offered. On September 10th, UBS AG (UBS) proposed a $585 million package that would allow the organization to refinance a huge chunk of its existing debt. Though not as firmly as it did in the shadow of the original (and relatively less restrictive) $25 million offer from late August, RadioShack stock perked up on the possible loan from UBS too.

And why not? There’s no such thing as too much cash, and if a company clearly needs liquidity to survive, any chance to put some in the coffers is a good thing.

On the other hand…

While the idea seems like salvation on the surface for RadioShack stock, anyone who’s optimistic that any sort of cash infusion will keep RSH from tanking may want to look deeper into the numbers.

Crunching the RSH Numbers

For the sake of clarity, even the staunchest of RadioShack stock owners and company supporters recognize major changes need to happen in order for RadioShack to survive. Greater liquidity will help, but the benefit of cash at this point is the purchase of time. With more time, these investors believe the RadioShack turnaround effort will be able to find more self-sustaining traction.

Where these fans and RadioShack stock holders may be misguided is in the scope of the turnaround needed to get the company off of life support.

For instance, as of the end of last quarter, RSH was sitting on $30 million in cash. Adding the $25 million Standard General was prepared to offer would nearly double its warchest. What last quarter’s cash tally doesn’t illustrate well enough, however, is that at this time a year earlier, RadioShack was sitting on $316 million.

Yes, the company burned $286 million in cash in a year, and has nothing to show for it. Year-over-year sales have fallen significantly every quarter since (down 22% last quarter) and losses have widened, reaching a loss of $137.4 million last quarter. That’s a bigger deficit than the $112.4 million loss RadioShack posted in the same quarter a year earlier, despite the fact that the turnaround effort was supposed to be underway in the meantime.

Worse, the losses have been trending bigger and bigger for two years now.

In light of that cash burn rate (and in addition to the fact that Q4’s holiday shopping mania has tended to create the widest quarterly loss in each of the prior two years), another $25 million will only buy RadioShack about one more quarter. After that, it’s going to need more cash — a lot more.

As for the potential $585 million funding UBS and Standard General might be willing to back, this wouldn’t alter the balance sheet significantly, nor would it save the company a great deal of money. The retailer only paid about $17 million in interest payments last quarter, which isn’t debilitating.

So why bother? RSH presently has $657 million worth of long-term debt on the books, a big piece of which is in the form of loans that are not only restrictive, but come due in 2019. The purpose of this new loan would primarily be to kick the proverbial can down the road by replacing most of its current long-term liabilities. The total amount due, however, wouldn’t change, and even smaller interest payments would only make a tiny dent in quarterly losses now regularly in excess of $100 million.

Bottom Line for RadioShack Stock

The point is, while the chatter of a cash infusion is being spun as if it solves key problems, it won’t. RadioShack doesn’t have a balance sheet problem. It doesn’t really have a liquidity problem (not directly, anyway). It has a plain, old-fashioned sales-and-expense problem, and no amount of money in the world is going to help RadioShack stock if the company can’t draw more customers into its stores and inspire them to spend.

That starts with getting the right merchandise in stores, and pricing it competitively with the likes of Amazon (AMZN), Walmart (WMT), and dozens of other retailers selling the exact same goods. The closest that CEO Joseph Magnacca has gotten to addressing sales as part of the turnaround effort is remodeling some stores and adding more contemporary brand names like Beats audio goods.

To be fair, the “new and improved” RadioShack concept has been relatively well received where they’ve been established. However, less than 100 of the company’s 4000 units have been remodeled and given modernized product lines. And only about 100 more such stores are planned in the near term as part of the turnaround effort. Those few stores can’t carry the whole company.

In simplest terms, the race is on. The company is racing to prove it can turn itself around before backers and RadioShack stock owners feel like they’re just throwing away good money after bad. It’s apt to be a losing battle on the company’s part, however. Not only is the cash burn rate now too brisk for RadioShack to control, the company’s need to close unsalvageable stores doesn’t exactly inspire lenders who have already established store-closure limitations on their funding offers.

It’s a catch-22 at best, and more plausibly, it’s a death spiral. Nevermind the fact that RadioShack was in the same dire spot around this time last year, successfully singing the same “we just need a little more time and money” song.

Investors, don’t fall for it again.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/radioshack-stock-rsh-sell/.

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