NEW YORK (TheStreet) -- RadioShack (RSH) shares continued the week's upward trajectory on Friday, on volume that was more than seven times the stock's three-month average following continued investor optimism that the struggling electronics retailer could get a lifeline.
Rumors surfaced on Tuesday that Standard General, the same hedge fund that extended a $25-million lifeline to American Apparel (APP) last month, was working with RadioShack to create a financing package that would help it avoid bankruptcy, according to Bloomberg. It was unclear whether the lifeline would come in the form of debt or equity. The Bloomberg article also stated that Standard General was seeking to refinance a $250 million second lien term loan. Standard General owns about 7% of RadioShack's stock, according to Bloomberg.
Shares were surging 14% to $1.63 on Friday, the stock's fourth straight day of double-digit gains, even though no official announcement has yet been made. RadioShack lost $98.3 million in the three months ended May 3, and store sales declined 14% from the year-ago period. The Fort Worth, Texas-based company said in June that it closed 22 stores in fiscal 2015 and expects to close up to 200 underperforming stores -- far short of the 1,100 it had initially projected, after lenders had issues with the planned closings.
RadioShack did not immediately respond to a call seeking comment by TheStreet. A spokesperson for Standard General declined to comment.
Read More: RadioShack Rises for the Fourth Straight Day
Here's what analysts are saying about the speculation.
Anthony C. Chukumba, BB&T Capital Markets (Hold)
While we are loathe to comment on media speculation, in our experience where there is smoke there is fire, and we would characterize the jump in RadioShack's stock price the last few days as a raging inferno. We would consider any type of rescue financing as a positive development, particularly if it allows the company to aggressively close underperforming stores (as a reminder, RadioShack announced plans earlier this year to shutter 1,100 locations, only to be rebuffed by its creditors). That said, we will wait to see the terms of any new lending agreements before formulating a definitive opinion.
While a rescue financing package could potentially save RadioShack from having to file for bankruptcy in the near future, the company would not be "out of the woods" by any stretch of the imagination in our view. RadioShack would still face myriad issues (e.g., the slowdown in the wireless business, increased competition, secular declines in multiple product categories, the death of the do-it-yourself consumer electronics repair business, etc). In addition, we think Best Buy's ( (BBY) -$32.24-Buy) recent cautious commentary on H2'14 (including for the wireless business) portends very poorly for RadioShack. Thus, we believe a refinancing may only serve to delay the company's ultimate demise.
William Frohnhoefer, BTIG Research (Neutral)
Any capital infusion would likely be dilutive to the equity, either indirectly (by layering more secured debt on the balance sheet) or directly (by being raised through an equity offering). In terms of the different constituencies of this name, the existing secured creditors seem to be indifferent to outcomes, given the extent of their engagement with other stakeholders.
The unsecured bondholders would definitely not want to see more debt layered on top of them by a new financing, and all things being equal, might prefer a filing sooner rather than later to preserve as much of their recovery as is left. They are in an equivocal position: there will most likely be more debt layered on them outside of reorganization (if the reported refinancing ever takes shape), and also inside of it, since we think the firm would need an expanded debtor-in-possession facility of some kind, even if the existing term loan were converted into a DIP.
The equity holders want to see a refinancing: it is their one chance, in our view, of recovering any value. And they would likely prefer any accompanying dilution than putting up too much new capital. We maintain our rating, and struggle to see any fundamental reason for the stock move absent a palpable term sheet.
TheStreet Ratings team rates RADIOSHACK CORP as a Sell with a ratings score of D-. TheStreet Ratings Team has this to say about their recommendation:
"We rate RADIOSHACK CORP (RSH) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Specialty Retail industry. The net income has significantly decreased by 127.0% when compared to the same quarter one year ago, falling from -$43.30 million to -$98.30 million.
- The debt-to-equity ratio is very high at 8.46 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, RSH has a quick ratio of 0.51, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Specialty Retail industry and the overall market, RADIOSHACK CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- Net operating cash flow has significantly decreased to -$37.80 million or 323.66% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 75.90%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 177.14% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- You can view the full analysis from the report here: RSH Ratings Report
--Written by Laurie Kulikowski in New York.