The turnaround at RadioShack Corporation (RSH) has taken a turn for the worse.
One of the company’s major lenders, Salus Capital, has called its $250 million loan because of alleged violations of covenants. Of course, RadioShack CEO Joe Magnacca thinks the move has no merit.
But right or wrong, there seems to be less hope today than ever for RadioShack stock holders.
Magnacca has tried hard to get the beleaguered company back on track. Three months ago, he arranged a hail-Mary financing of $585 million from hedge fund Standard General LP. The move essentially staved off a bankruptcy filing and allowed RSH breathing room to see if it could get traction in the upcoming holiday season — traction it lacked and desperately needed. Consider that — for the 13 weeks ended Aug. 2 — same-store sales plunged by 20% and the company posted a loss from continuing operations of $137.4 million, up from a loss of $51.4 million in the same period a year ago.
Heck, RSH has lost money for 10 consecutive quarters.
And that intensifies the problem that Magnacca’s turnaround plan is fuzzy. In the latest earnings report, he noted that RadioShack would engage in more cost cutting and that he would take steps to reduce the reliance on the mobile phone business. He also said he would “reinvigorate the store experience and revamp our product assortment.”
But such things ultimately won’t do much to revive this relic of a bygone era.
RadioShack simply doesn’t offer unique products anymore. You can buy RSH wares from many places — brick-and-mortar companies such as Walmart (WMT), Best Buy (BBY) or Target (TGT) carry most of the same consumer products and gadgets, and you can find all that as well as many tech-repair items on Amazon.com (AMZN) and other online portals.
The only way to fight back is to slash prices, but again, RSH doesn’t have the scale to compete on this basis, either. The typical store size is only 2,500 square feet — less than a tenth the size of your typical Best Buy stores.
Even the company’s marketing efforts have also been inexplicable. RSH hired comic singer “Weird Al” Yankovic for its commercials, where he makes fun of the ’80s, merely reinforcing the perception that it’s passe. That’s not ironic … it’s just cruel.
And even if RadioShack can pull off a miracle and stabilize sales long enough to keep the doors open another six or 12 months, RadioShack stock holders still face grim prospects. Standard General has a right to convert $120 million of its holdings into common stock, which would mean substantial dilution considering RSH has a market cap of just $82 million currently.
The outcome seems obvious for anyone actually holding on for a miracle: more losses. Yes, RadioShack stock will continue to see volatile moves that traders can play, but this game won’t last very long — especially now that lenders are taking strong measures to get their money back.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.