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Fitch: Secular Headwinds and Liquidity Constrain RadioShack’s Turnaround

March 07, 2014, 07:45 AM
Filed Under: Retail

RadioShack's weak operating results are expected to further constrain its liquidity in 2014, leaving the company with a limited window of opportunity to turn around its business, according to Fitch Ratings.

On March 4, 2014, the company reported a 19% comparable store (comp) sales decline during the fourth quarter of 2013, and a nearly 500 basis point (bp) gross margin contraction. EBITDA for full-year 2013 was negative $161 million, materially worse than Fitch's expectation of negative $80 million to $100 million. This compared with positive EBITDA of $48 million in 2012 and $283 million in 2011.

RadioShack's cash of $180 million at year-end 2013 is down from $536 million at year-end 2012, and its revolver availability was $375 million, down from $391 million a year ago, broadly in line with Fitch's expectations. Fitch believes that the company's liquidity will be sufficient to finance its operations over the next 12 months, though with limited cushion as its operations continue to consume cash.

Fitch projects EBITDA will remain in the negative $150 million to $200 million range in 2014 and 2015, as the benefit from the planned closure of up to 1,100 stores (26% of its domestic store base) is expected to be offset by continued negative trends in the underlying business. Fitch assumes that the closed stores are 15% less productive than the average U.S. store, leading to a revenue decline from store closures of around $600 million. Fitch further assumes that comp store sales will decline in the mid-single digit range over the next two years.

Gross margin rates are expected to begin to gradually recover in the second half of 2014 and be roughly flat in the full year compared with 2013, while SG&A is expected to decline by 10%-12% in each of 2014 and 2015, or around $150 million annually, as a result of the store closures and a reduction in corporate-level expenses. More substantial declines in SG&A could offset some of the projected gross profit dollar declines.

As a result, free cash flow is expected to remain sharply negative at around -$150 million to -$200 million in 2014, substantially consuming the company's cash balances. This is based on EBITDA of negative $150 million to $200 million, interest expense of over $50 million and capex of $50 million, partly offset by an expected benefit of up to $100 million from the liquidation of inventories in the closed stores.

Fitch expects RadioShack will have to tap its revolver during 2014 to finance a seasonal working capital swing of $100 million to $150 million.

Fitch believes that free cash flow could be in the negative $200 million range in 2015, assuming steady inventories, and that company would have to rely heavily on its revolver to absorb these losses.

Weak underlying trends in RadioShack's mobility and consumer electronics businesses are complicating its effort to stabilize its operations. Within RadioShack's U.S. Company-Operated Stores Segment, comparable store mobility sales (wireless phones) were down 9% mainly due to unit declines, and comparable store retail sales (consumer electronics, batteries, etc.) were down 8.5% in 2013.

RadioShack is still in the early stages of expanding its merchandise offerings in growing categories such as headphones and portable speakers, but sales from these categories will not likely be sufficient to offset the secular declines in the company's existing mobility and consumer electronics businesses for at least the next 12 months.

Fitch currently rates RadioShack as follows:

  • Long-term IDR 'CCC';
  • $535 million senior secured ABL revolver 'B/RR1';
  • $50 million senior secured ABL term loan 'B/RR1'
  • $250 million secured term loan 'CCC+/RR3'
  • Senior unsecured notes 'CC/RR6'.

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