RadioShack seeks lender approval to close 1,100 underperforming stores

By Paul Deckelman

New York, March 4 - RadioShack Corp., the one-time consumer electronics retailing powerhouse now in the midst of an extensive turnaround effort following a lengthy slump, unveiled plans on Tuesday to close as many as 1,100 of its more than 5,000 company-owned or franchised stores in the United States and will be seeking the approval of its ABL credit facility and term loan lenders to do so.

It also expects that the net impact of those store closings on its liquidity position will be positive, with any costs incurred for early termination of leases on the stores that it ultimately selects to close to be more than offset by the cash that the company expects to generate from the liquidation of the inventories of those stores.

Liquidity considered ample

Executives of the Fort Worth, Texas-based company told analysts on their Tuesday conference call following the release of results for the 2013 fourth quarter and full fiscal year ended Dec. 31 that with the company having successfully completed $835 million of new financing in December, it ended the year with $554.3 million of total liquidity. That included $179.8 million of cash and cash equivalents and $374.5 million of availability under its new asset-based revolving credit facility due 2018.

"We expect our liquidity will be sufficient to meet our obligations [and] to meet our planned operations through 2014," John W. Feray, the company's recently installed chief financial officer and executive vice president, declared on the call.

Liquidity was down sequentially from about $613 million at the end of the third quarter on Sept. 30, which included $316.4 million of cash and equivalents and $296.2 million of available credit under its former ABL revolver due 2016, which was refinanced in December.

Feray noted that the company's liquidity had been impacted by sales decreases during the fourth quarter. Total net sales and operating revenues came in at $935.4 million versus $1.17 billion a year earlier, with comparable-store sales down 19% year over year, driven by traffic declines and soft performance in what RadioShack calls its mobility business - the sale of wireless phones, tablets and wireless service contracts or pre-paid minutes for such devices.

Deal boosts balance sheet

In December, RadioShack entered into a new $585 million five-year senior secured ABL credit facility led by GE Capital, Corporate Retail Finance, consisting of a $535 million revolving line of credit and a $50 million term loan. The term loan is a first-in-last-out loan that was drawn and funded at closing and carries a rate of Libor plus 400 basis points. The new facility is secured by the inventory and accounts receivable of the company's U.S. operations. As of Dec. 31, it was undrawn other than letters of credit totaling $55 million.

At the same time, it entered into a $250 million five-year secured term loan led by Salus Capital Partners, LLC at rate of Libor plus 1,100 bps. The term loan was drawn and funded at closing and is secured by a second lien on the assets securing the new ABL credit facility and a first lien on certain other assets of the company.

RadioShack used the proceeds from the financing to refinance its existing debt - it exited the existing $450 million ABL credit facility and the two accordions totaling $75 million and retired an existing $100 million second-lien term loan, paying off a total of $175 million of existing debt - and to provide about $200 million of incremental liquidity.

Besides the new revolver and term loan facilities, RadioShack's capital structure also includes $325 million of 6¾% junk notes due 2019.

Total debt was $614 million at Dec. 31, all of which matures between 2018 and 2019. That was up from $499 million at Sept. 30, though down from $778 million at the end of 2012. During 2013, besides the aforementioned transactions, RadioShack repaid $286.9 million of 2½% convertible notes, about $70 million in last year's first quarter and the remainder upon their maturity last Aug. 1.

Lender approval needed

During the question-and-answer portion of the conference call that followed his formal presentation and that of RadioShack's chief executive officer, Joseph C. Magnacca, Feray noted that the proposed store-closing program is subject to the consent of its revolver and term loan lenders.

He said that as it currently stands, the company is allowed to close up to 200 of its stores per year and up to 600 over the life of the overall credit agreement, "and we are working with our lenders to obtain the overall consent. We will be working over the next month to get that consent."

When asked whether RadioShack had considered a pre-packaged bankruptcy as a way of getting out of its leases on the underperforming stores that will be slated for closure more quickly, Feray replied that it had not, quickly adding that "looking at everything we have, we have enough liquidity for the remainder of the year when you look at the overall inventory position, working capital changes, the capital expenditures [and] borrowing availability under our new credit facility. We believe our anticipated sources of liquidity will be sufficient to meet our obligations in 2014."

As for getting out from under the store leases, the CFO said that "in the coming weeks, we'll be working with our landlords to find an efficient and cost-effective means to exit these unprofitable locations."

The exact stores to be closed have not been announced and most remain to be selected, but they will be the company's least-profitable stores. Magnacca said that the company had begun its formal real estate reviews almost as soon as he arrived to take command last February. He said that in some markets, there were just too many stores operating too close to one another. He said that there are eight stores within a five-mile radius of his own home in Fort Worth, "so in that example, we are over-stored." In other markets, besides over-saturation, "there were opportunities where the real estate we currently had was not appropriate for our go-forward position."

Feray also mentioned the possibility that during negotiations on breaking the lease on a particular location slated for closing, the landlord might offer to cut the lease payments or offer some other incentive that would suddenly make the store, at least on paper, more profitable and avert its prospective closing.

During the fourth quarter, RadioShack's operating loss widened to $344 million from $25 million a year earlier. on an adjusted basis, excluding one-time items, the operating loss was $239.9 million.

The net loss also widened during the quarter to $400.2 million, or $3.97 per diluted share, versus $139.4 million last year. On an adjusted basis, the net loss was $305.8 million, up from $60.5 million a year ago.

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