Fitch Affirms RadioShack's IDR at 'CCC'
NEW YORK -- October 1, 2013
Fitch Ratings has affirmed its 'CCC' Long-term Issuer Default Rating (IDR) on
RadioShack Corporation (RadioShack). A full list of rating actions follows at
the end of this release.
Key Rating Drivers:
The ratings reflect the significant decline in RadioShack's profitability and
cash flow, which has become progressively more pronounced over the past six
quarters. Weak results have been due in particular to pressure on the
company's mobility segment, and have led to a marked deterioration in the
company's credit profile. There is a lack of stability in the business and no
apparent catalyst to stabilize or improve operations.
EBITDA of $8.3 million in the 12 months ended June 30, 2013 compares with $283
million in 2011 and $444 million in 2010.
EBITDA was negative in the second quarter of 2013, and Fitch estimates it will
be in the negative $20 million-$40 million range for the full year. In 2014,
in the absence of a meaningful gross margin recovery in the signature platform
to offset continued margin pressure in the mobility segment and sharp sales
declines in the consumer electronics platform, Fitch projects EBITDA could
remain depressed at 2013 levels.
RadioShack's liquidity is adequate. Pro forma for the repayment of $214
million of convertible notes in August 2013, the company is left with $218
million in cash (excluding restricted cash) and $386 million available on its
secured credit facility. The company's seasonal inventory swing is estimated
at the lower end of the range of $150 million-$250 million, indicating that
the company may not have to tap its revolver leading up to the holidays.
Free cash flow (FCF) is estimated at around negative $50 million this year,
even after some benefit from a reduction in working capital due to ongoing SKU
reductions. Broadly assuming annual capex of $50 million, interest expense of
$40 million and neutral working capital, with total fixed obligations of
around $90 million, FCF could be negative $100 million or more in each of the
next two years. Fitch estimates the company will have sufficient revolver
capacity to handle projected negative FCF and working capital swings over this
period, though it will have very limited headroom in 2015 unless it is able to
raise additional capital.
The company has indicated that it may seek to refinance its existing secured
debt on more favorable terms. The nearest maturities are the revolver and a
$50 million term loan maturing in January 2016.
Sales Mix Primary Challenge
RadioShack's push into mobile phones, which represented 53% of 2012 sales
versus 30% in 2007, and the shift to smart phones, have led to significant
margin compression. The penetration of smart phones will continue to grow,
albeit at a slower rate, keeping downward pressure on mobility margins. Recent
growth from the higher-margin signature platform, should it continue, could
provide some support to margins over time, though consolidated profitability
will remain depressed.
Comparable store sales declines in 2011-2012 were followed by a slight 1.3%
increase in comp sales in the second quarter of 2013, driven by inventory
clearance activity. Of the company's three key product platforms, sales in
consumer electronics (CE) were down 11.3% in the first half (in U.S.
company-operated stores), and mobility was down a slight 0.9%, while the
signature platform, which includes wireless accessories, was up 4.6%. Over the
next few quarters, inventory clearance activity will provide some support to
comp store sales but keep downward pressure on gross margins.
RadioShack's small-box consumer electronics stores have lost much of their
relevance given that mobile phones and other small electronics are widely
available at large box retailers and the wireless carriers' own stores, as
well as online. For the company to survive long-term, management will have to
find new products that are exciting and unique to RadioShack. However, even if
it is successful in doing so, Fitch believes it will be difficult to change
customer perceptions of the chain.
The ratings on the various securities reflect Fitch's recovery analysis, which
is based on a liquidation value of RadioShack in a distressed scenario of
about $638 million. Most of the value comes from inventory (of which
approximately 50% is estimated to be mobile phones), and accounts receivable,
including receivables from wireless carriers (net of estimated payables to the
Applying this value across the capital structure results in an outstanding
recovery prospect (91%-100%) for the asset-based lending (ABL) facility, which
includes both the $450 million revolver and the two term loans totaling $75
million (which have a last-out provision), and are therefore rated 'B/RR1'.
The ABL facility is collateralized by a first lien on inventory, receivables,
and key real estate.
The $100 million term loan due Sept. 2017 is rated one notch below the ABL at
'B-/RR2'. The facility has a first lien on intellectual property; furniture,
fixtures, and equipment (FF&E); and, some nominal real estate, to which Fitch
does not attribute much value. The term loan facility also has a second lien
on the collateral securing the ABL facility. The unsecured senior notes are
rated 'CC/RR6', reflecting poor recovery prospects (0%-10%).
Stabilization in the business leading to a sustainable recovery in operating
trends and financial flexibility could lead to an upgrade.
Continued deterioration in EBITDA that further constrains cash flow and
liquidity, and impedes the company's day to day operations would lead to a
Fitch has affirmed the following ratings:
--Long-term IDR at 'CCC'
--$450 million senior secured revolving credit facility at 'B/RR1';
--$75 million senior secured term loan tranches at 'B/RR1'
--$100 million senior secured term loan facility at 'B-/RR2'
--Senior unsecured notes at 'CC/RR6'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers'
(Nov. 13, 2012).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Philip M. Zahn, CFA, +1 312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Monica Aggarwal, CFA, +1 212-908-0282
Sharon Bonelli, +1 212-908-0581
Brian Bertsch, +1 212-908-0549
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