June 11 (Bloomberg) -- RadioShack Corp.’s plan to revive its stores would have been difficult to execute even in the best of times. Now it’s contending with an industrywide slump in electronics demand that’s also hurting healthier rivals.
While many of RadioShack’s challenges have dogged it for years -- namely, how can its small-format locations compete in an industry dominated by big-box stores and online retailers -- the company said yesterday that soft demand for mobile phones was a big contributor to its 14 percent decline in same-store sales. Best Buy Co., Wal-Mart Stores Inc. and HHGregg Inc. have recently reported weaker electronics results, too.
“There is a bit of a slump,” Scott Tilghman, an analyst at B. Riley & Co. in Boston, said in an interview. “There hasn’t been a lot of innovation over the last few quarters, there hasn’t been a lot of new product coming to market.”
That slowdown may rob RadioShack Chief Executive Officer Joe Magnacca of the time he needs to cut costs and develop new merchandise, while making it harder to generate cash and pay back creditors. RadioShack also is “very unlikely” to entice acquisition suitors, said Oliver Wintermantel, an analyst at International Strategy & Investment Group in New York.
Best Buy had been viewed as a possible acquirer a few years ago when it was rolling out its smaller-format stores, but they’re not interested now, he said. Private-equity firms, meanwhile, would stay away because “free cash-flow is nonexistent.” Best Buy declined to comment.
RadioShack’s loss last quarter widened to $98.3 million from $28 million a year earlier, the Fort Worth, Texas-based company said yesterday. Sales slid 13 percent to $736.7 million in the period, which ended May 3, marking the ninth straight quarterly decline.
Excluding some items, the loss was 98 cents a share, almost twice as large as the 51-cent deficit analysts estimated. RadioShack fell 7.2 percent to $1.28 at the close in New York after a 10 percent drop yesterday.
RadioShack’s operations consumed $37.8 million in cash, and the company ended the quarter with cash and equivalents of $61.8 million, down from $109.6 million a year earlier. The company said it had an additional $361.9 million of liquidity available through a credit agreement.
While the retailer doesn’t face any maturities until $300 million of term loans and the revolver come due in December 2018, its $423.7 million of liquidity in the form of cash and borrowing ability will be exhausted sometime in 2016, according to analysts’ estimates of cash burn compiled by Bloomberg.
Wintermantel said the company could run out of liquidity sooner, perhaps by next year. Still, the company predicted yesterday that its sales and gross margins will improve over the next 12 months. If that happens, creditors could extend more rope, he said.
RadioShack’s $325 million of 6.75 percent bonds due May 2019 dropped 1.5 cents at 2:41 p.m. in New York to 41.5 cents on the dollar for a yield of 30 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt reached a record-low 35 cents on May 19.
RadioShack’s troubles are hitting as a broad swath of retailers is dealing with shaky consumer confidence, forcing them to deepen discounts and imperiling profitability. The Standard & Poor’s 500 Retailing Index has dropped 5.1 percent this year, compared with a 5.2 percent gain for the broader S&P 500.
The industrywide softness is hurting RadioShack even more than competitors because it’s concentrated in mobile phones, while rivals have broader assortments, said Anthony Chukumba, an analyst at BB&T Corp. in New York.
“There’s just not a lot of compelling product that’s come out recently, particularly in mobile, and RadioShack is a lot more focused in mobile,” said Chukumba, who has the equivalent of a hold recommendation on the shares.
On the company’s earnings call yesterday, Magnacca cited aggressive deals from wireless companies and “lackluster consumer interest” in currently available phones, along with declining demand for consumer electronics.
Magnacca’s turnaround effort already had hit a snag earlier this year when creditors blocked a plan to shut 1,100 underperforming stores, forcing RadioShack to limit closings to as many as 200 instead. RadioShack is continuing conversations about store closings with lenders, executives said on the call.
Magnacca, a former drugstore-chain executive, has brought in a new team of leaders and overhauled store design to revive the business. The company jokingly referenced the process of updating its aged stores in a 2014 Super Bowl commercial featuring Hulk Hogan and other 1980s characters.
Last week, the retailer said it’s teaming up with product-developer PCH International of San Francisco to help startups design goods for direct sale to RadioShack stores.
“While we face headwinds in our sector of retail, we have a clear vision for RadioShack’s future, and a detailed strategy to turn the business around,” Magnacca said on the call. The company has reduced some sourcing costs and boosted its assortment of products from Apple Inc., he said.
Still, RadioShack may not have enough time to enact that turnaround, Tilghman said. Not only is the magnitude of the electronics sales decline worse at RadioShack, it’s also running out of resources, he said.
“At this rate of cash burn, I think the vendors are going to begin to get nervous,” said Tilghman, who recommends selling the shares. “Their near-term fate rests with the vendors” as the critical back-to-school and holiday seasons approach. He estimated a “better-than-50-50 likelihood” that the company may need to seek protection from creditors.
RadioShack has been working with its vendors, and its relationship with its top suppliers “will continue to be strong,” Chief Financial Officer John Feray said on the call.
The continuing slump has drawn the ire of investors, who rejected the company’s executive compensation for the second year in a row, according to a filing this week. About 55 percent of votes were cast against the compensation plan in a nonbinding referendum at last week’s shareholder meeting, not counting abstaining investors.
Other consumer-electronics sellers have reported tepid demand in their most recent quarters as well. Best Buy’s sales trailed analysts’ estimates as mobile-phone and tablet purchases waned. Sears Holdings Corp. said weak consumer-electronics sales pulled down its revenue, and HHGregg posted a 19 percent same-store sales decline in the category.
That’s especially a problem for RadioShack since it’s already been losing ground to those rivals, said Michael Pachter, an analyst at Wedbush Securities in Los Angeles.
“RadioShack has been losing share for several years in its key product categories,” Pachter said in a note last week. “We expect share losses to magnify weak overall demand for its products.”
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