The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
According to various media reports on Thursday, RadioShack (NYSE:RSH) could be hiring a financial advisor ahead of a potential restructuring. While early reports suggested a potential bankruptcy, we think it is more likely that RadioShack intends to rationalize its inventory and perhaps raise some capital to reformat its stores.
RadioShack has significant debt and faces ongoing cash flow burn. RadioShack’s 2013 convertible notes, which had a principal amount of $216.4 million at the end of Q1, are due on August 1. Its liquidity position at the end of Q1 included cash of $434.9 million, restricted cash of $26.5 million, and a credit facility with $384.9 million of availability. Its debt totaled $711.9 million at the end of Q1.
A potential balance sheet restructuring was likely the key driver of Thursday’s decline. We believe that RadioShack has sufficient liquidity to allow the August debt repayment; however, the reports of a potential restructuring suggest that its liquidity or recent business performance may have lagged expectations. Should cash flow continue to be negative, it is possible that RadioShack may trigger breaches of existing debt covenants.
We expect significant losses to continue, and are not optimistic that the company’s turnaround will be successful. RadioShack expects weakness throughout 1H:13. We remain pessimistic that the company can grow mobility margins, as it has little power over smartphone or post-paid pricing. Management clearly hopes to sell more accessories and pre-paid phones, but we think its fundamental problems are traffic-driven, and we expect traffic declines to continue.
RadioShack has recently implemented a number of initiatives to boost the company’s image and store traffic. These include a partnership with Beats By Dre, new display areas instore dedicated to wearable digital fitness technology, a new do-it-yourself product line in partnership with Maker Media, and a five-year agreement with NACSCORP to offer consumer electronics and accessories to nearly 4,000 college stores. On July 1st, RadioShack opened its first concept store in Manhattan. While these steps are promising, the company may run out of time.
Reiterating our UNDERPERFORM rating and 12-month price target of $1 as losses grow from declining CE and margin erosion, compounded by investments to spur growth. Our PT reflects our best guess at the brand equity and going-concern value for the business (around $300 million), net of its net debt.
Michael Pachter is an analyst at Wedbush Securities.