RadioShack’s Last Hope for Survival: Shrinking Fast in Bankruptcy

RadioShack’s mission—to shrink like crazy—hasn’t been accomplished fast enough. The ailing electronics retailer said on Thursday that it may not be able to avoid bankruptcy. While still holding out hope for new financing, the company acknowledged it could run out of money soon (some analysts think this could happen within a month).

In the broadest sense, RadioShack’s problems are those of the retail industry. Buying gadgets on the Internet is usually cheaper and more convenient. Running a network of 4,000 stores isn’t cheap, and it’s hard to make the numbers work when same-store sales are dropping 20 percent per quarter. RadioShack’s phone-selling business has been hit particularly hard, because wireless carriers have been undercutting the retailer on price.

RadioShack’s survival plan is developing services that aren’t available online. It’s building in-store phone-repair operations and experimenting with concept stores designed as places where people can try out headphones and poke around with connected gadgets. The 84 concept stores open so far have been performing better than the rest of the chain.

It’s unclear whether this can work at all, but the only chance is if RadioShack becomes much smaller. Earlier this year, after the company moved to close 1,100 stores, its lenders refused to approve the plan. Instead, the retailer got permission to close 200 stores this year and the same number each of the next two years. In the meantime, RadioShack is trying to cut expenses by negotiating lower rents and cutting hours to save on labor costs.

This isn’t enough. RadioShack reported a net loss of $137 million for the last quarter, two and a half times the loss from a year earlier. The company has only $30 million in cash as well as $152 million in available credit. “It’s clear that the pace of our turnaround is not fast enough,” Chief Executive Officer Joseph Magnacca told investors on Thursday in an uncomfortable earnings call. He decided against holding the customary question-and-answer session.

Magnacca said RadioShack is in “advanced discussions” with potential lenders. My colleagues at Bloomberg News reported that UBS and Standard General are working on loans for the company. If these don’t work out, RadioShack could look for someone to acquire it. The retailer has also hinted at partnerships, although it’s not clear exactly what that could mean.

The other alternative is bankruptcy. Michael Pachter of Wedbush Securities says he believes RadioShack will be forced to take this route within a month. Pachter on Wednesday cut his price target for RadioShack stock to zero; shares are currently hovering around 97¢.

A bankruptcy could provide the opportunity to shrink fast enough to make a difference. RadioShack’s lenders have good reason to keep it from closing stores right now. Getting out of 1,000 commercial leases will cost a significant amount of money, and there’s no guarantee it would get the retailer on stable ground. If the company declares bankruptcy, it can get the leases canceled outright and leave more money for repaying its other debts. This would make the lenders happy and give RadioShack time to adjust its ambitions to the reality it faces.

Bankruptcy protection might not keep the company from failing altogether, but it might also be its only chance.

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