The Deal: RadioShack Struggles to Pay Down Debt as Losses Rise

NEW YORK ( The Deal) -- While troubled electronics retailer RadioShack ( RSH) just met a deadline to repay its notes, a ratings agency has warned that it could default on its debt in the next 12 months unless it makes a turnaround.

The Fort Worth, Texas-based company could be facing a liquidity crisis or financial restructuring in the next year, unless it makes significant progress, ratings agency Standard & Poor's warned in an Aug. 1 report.

In late July, RadioShack hired restructuring expert AlixPartners and investment bank Peter J. Solomon as financial advisers for a turnaround of the company.

One of the AlixPartners' managing directors, Holly Etlin, has also been named as RadioShack's new interim CFO, replacing Dorvin Lively, who left the company.

S&P downgraded the company's corporate credit rating and the rating on its $325 million in 6.75% senior unsecured notes due May 15, 2019 to CCC from CCC+, in the report.

"The company is dependent on progress with its strategic turnaround to reverse the substantial decline in profitability and ongoing cash use in order to avoid a financial restructuring," the S&P report said.

RadioShack has opened a new concept store, which is designed to offer a friendlier customer experience, while also giving customers a cleaner and more modern shop, but it remains to be seen if the strategic changes will be enough to alter its downward financial path. According to Moody's senior analyst Manoj Chadha, the company is revamping its stores and reducing the number of SKU's it carries in the stores in order to streamline its inventory and reduce its cash burn.

While it has also hired advisors, "it's still early in the process and hard to see any positive traction due to strategic initiatives at the moment," Chadha said, adding that "refinancing options seem quite limited given the company's operating performance."

The company paid down roughly $214 million of 2.5% convertible senior notes, which came due on Aug. 1 with cash, a RadioShack spokesman confirmed Friday, Aug. 2. RadioShack declined to comment further.

Since the debt pay-down, the company's liquidity is estimated at $215 million in cash and $385 million in revolver availability, which expires in January 2016, the S&P report said.

However, RadioShack's cash and credit availability is expected to diminish as the holiday season approaches. S&P doesn't expect the company to generate any free operating cash flow in 2013 due to its poor profitability, and believes its access to the capital markets is limited.

But, Chadha said the company has an ample liquidity runway and isn't expected to have any major capital expenditures this year.

"The company's operating performance has experienced steady deterioration over several quarters and we now view liquidity as weak under our criteria," said S&P credit analyst Nalini Saxena, in the report. "Our view incorporates an assumption of ongoing tightening of vendor terms and outlays required to pursue the product mix shift and store refresh initiatives designed to kick start a revival of the business."

RadioShack announced its second quarter earnings on July 23, reporting a net loss of $53 million for the quarter ended June 30, up 152% from a loss of $21 million for the same period a year ago as its revenue decreased to $845 million in the second quarter of 2013 from $849 million year-over-year. The company did have a 1.3% increase in comparable store sales. The company had $713 million in debt maturing between 2016 and 2019, as of June 30, before its recent debt pay-down.

RadioShack's stock, which trades on the New York Stock Exchange under the symbol RSH, closed at $2.57 on Friday, down from Thursday's closing price of $2.89.

According to Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm, RadioShack is in tremendous trouble. "The segment they are in has been decimated," Davidowitz said, adding that consumer electronics retailers CompUSA and Circuit City Stores both went out of business and Best Buy ( BBY), which is the best in the class, is struggling.

The company is being pressured by online competitors, as well as AT&T ( T) and Verizon Communications ( VZ), which are growing like crazy and building stores everywhere, including in locations that RadioShack has its stores, Davidowitz said.

"They are a shrinking, deteriorating asset," Davidowitz said, adding that it's a toxic combination that RadioShack also has a lot of debt.

Written by Jamie Mason

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