RadioShack Results Push Bonds to Default Zone
After reporting its worst quarterly sales drop in almost 15 years, RadioShack Corp. (RSH) is as good as defaulted in the eyes of credit investors, according to Moody’s Corp.’s capital markets research group.
Revenue fell 28 percent in the fourth quarter to $935.4 million, the most since a 29 percent plunge in the first quarter of 1999, data compiled by Bloomberg show. The retailer’s credit-default swap and bond prices have reached levels implying its debt should be rated C, indicating obligations that are “typically in default, with little prospect for recovery of principal or interest,” Moody’s definitions show.
RadioShack, which is closing as many as 1,100 of its more than 5,000 stores, is combating technology that’s evolving faster than its marketing strategy, while facing competition from online retailers such as Amazon.com Inc. (AMZN) and big-box stores including Best Buy Co. (BBY) The combination has eroded the Fort Worth, Texas-based company’s cash to the lowest level since 2006 after it reported results for the fourth quarter, typically the most profitable period for retailers.
“Cash is going in the wrong direction in what should be a cash-producing quarter,” James Goldstein, an analyst at CreditSights Inc. who rates the company’s bonds “underperform,” said in a telephone interview. “I’m not really sure the market needs a RadioShack.”
The company’s $324.8 million of 6.75 percent notes due May 2019 dropped 9.75 cents to 56.25 cents on the dollar yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The 21 percent yield is more than three times the 5.5 percent average for companies in the Bloomberg High Yield Corporate Bond index.
The cost to protect RadioShack’s debt from default jumped yesterday to the most ever for one- and five-year contracts, according to data provider CMA.
Five-year credit-default swaps tied to RadioShack’s debt surged 7.7 percentage points to 45 percent upfront, according to CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $4.5 million initially and $500,000 annually to protect $10 million of RadioShack’s debt.
The one-year contracts doubled to 16.7 percent upfront. Credit swaps, which typically rise as investor confidence deteriorates and fall as it improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Ruth Pachman, a spokeswoman for the company at Kekst & Co., declined to comment on the market moves.
RadioShack, which began life in 1921 as a Boston-based mail-order retailer serving amateur ham radio operators and maritime communications officers, has tried to stay relevant in recent years by focusing on mobile-phone sales, touting the chain as a place for consumers to shop for devices and carrier plans. While that area has become the retailer’s best product category, it’s now contending with a saturated market, said David Schick, an analyst with Stifel Financial Corp. in Baltimore.
“The majority of folks have their mobile phones,” Schick, who has a “hold” rating on the shares, said in a phone interview. “We are past adoption.”
Bond manager Jeffrey Gundlach sums up RadioShack’s problems with a 1991 advertisement in The Buffalo News listing products for sale at “America’s Technology Store,” from mobile telephones and compact disc players to cassette tape recorders, calculators, and answering machines.
The technology of 13 out of the 15 items in the ad have been wrapped into the Apple Inc. iPhone Gundlach had in his pocket, the founder of Los Angeles-based DoubleLine Capital LP told the audience at a luncheon Feb. 19 hosted by the nonprofit CFA Institute, the global association of chartered financial analysts.
“People were really surprised to see just how far we’ve come from the world of 13 individual gadgets to one gadget,” he said in a telephone interview. And that gadget “is one 10th, roughly, of the price.”
RadioShack obtained $835 million of new five-year financing in October. The infusion is probably the last cash it will be able to raise in capital markets, according to Goldstein of CreditSights. Chief Executive Officer Joe Magnacca had sought the new financing to give vendors the confidence to supply him with exclusive products to distinguish RadioShack’s offerings from rivals’ merchandise.
Magnacca, who became CEO in February 2013, will receive a $500,000 retention bonus if he stays at the company through March 1, 2015, according to a regulatory filing today. Magnacca and other top executives were awarded the incentive compensation to keep them at the company as it faces a “difficult business environment.”
Magnacca’s total compensation in 2012 was $3.23 million, including a $645,833 salary and $1.19 million bonus, according to data compiled by Bloomberg.
“Their stock is worth nothing, so they can’t do an equity offering. It’s impossible to borrow in the unsecured market and everything is liened up at the secured level,” Goldstein said. “So they need to make it work with this current funding situation.”
RadioShack has “ample liquidity” for operations in 2014, John Feray, the chief financial officer, said on a conference call yesterday to discuss earnings with analysts and investors.
“They’re OK from a liquidity standpoint for the near to medium term, so they have some time to turn this thing around,” said Mickey Chadha, a Moody’s analyst who follows the retailer. “The main thing is whether or not they can actually stabilize their margins and lower their cash burn.”
Lower prices have failed to increase sales, reducing profitability. The company’s gross margin dropped to 29.8 percent last quarter, down from more than 50 percent in 2005 and the weakest performance in more than a decade.
Moody’s grades the company’s debt Caa1, and Standard & Poor’s an equivalent CCC+, Bloomberg data show. High-yield, high-risk, or junk, bonds are rated below Baa3 by Moody’s and BBB- at S&P. A basis point equals 0.01 percentage point.
RadioShack spent $136.6 million of cash in the fourth quarter, leaving it with $179.8 million and $374.5 million of a revolving credit line, against $339.1 million of cash outflows in the coming two years forecast by analysts in a Bloomberg survey. Unless it can slow the cash burn, it may run out of funds before its next debt maturity, $300 million of term loans due in December 2018. The revolver, which hasn’t been drawn, also matures at that time.
“The products that they sell are extraordinarily easy for people to buy online,” Gundlach, whose company oversees $49 billion of assets, said in a telephone interview. “Are they going to survive? I don’t know. Closing stores is not exactly a great way to grow.”
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