RadioShack Down on Recovery Plan Disruption - Analyst Blog

Electronics retailer RadioShack Corp. RSH suffered a serious setback in its turnaround efforts and consequently the stock price tumbled a significant 16.5% to $1.41. The company's difference in opinion with its lenders related to the closer of RadioShack stores is the primary reason behind this critical situation. Disagreement between management and its lenders about the number of RadioShack stores to be closed delayed the turnaround process.

RadioShack currently operates 4,300 stores in the U.S. The company has decided to close 1,100 stores as these outlets are generating suboptimal financial results. However, the company's credit agreement allows the closer of just 200 stores without the approval of its two major lenders, namely, Salus Capital Partners and GE Capital.

RadioShack's decision to go ahead with the store shut down without seeking the approval of these lenders has aggravated the situation. Management is currently targeting the close down of just 200 stores. Meanwhile, some lenders opined that as many as 2,000 stores can be closed. Lenders are also trying to negotiate for part of the proceeds from the closing of the stores as the repayment of their loans.     

In the last seven months the stock price of RadioShack has plummeted nearly 68%. Consumers now prefer purchasing online to visiting retail stores. Declining foot traffic has severely affected RadioShack's business. Most of the consumers prefer tablets and smartphones, which are less profitable for the retail industry. The core retail businesses of RadioShack, namely, the consumer electronics (including digital TVs, digital music players and digital cameras) platform continues its free fall.

Moreover, comparable store sales for the company-operated stores and kiosks (stores and kiosks that have been operational for at least a year) were down 19% in the last reported quarter. Importantly, core businesses have some material effect on the Wireless business. Core businesses indirectly drive wireless sales through increased foot traffic. Most of the customers who entered RadioShack stores intending to buy core products were generally attracted toward its latest wireless offerings.

Furthermore, RadioShack is facing intense competition from larger rivals like Best Buy Co. Inc. BBY and Wal-Mart Stores Inc. WMT. Best Buy is gradually rolling out small mobile stores. Best Buy plans to open 600 to 800 stores within 5 years, which in turn, will negatively impact RadioShack's market share. RadioShack is also facing stiff competition from online retailer, Amazon.com Inc. AMZN. RadioShack currently carries a Zacks Rank #5 (Strong Sell).