RadioShack says liquidity ample for turnaround plan, lenders supportive despite disagreement

By Paul Deckelman

New York, June 10 – RadioShack Corp., which continued to hemorrhage money during its recently completed fiscal first quarter, said it has sufficient liquidity to meet its needs over the next year as it pursues an ambitious turnaround strategy aimed at stemming those losses and ultimately restoring it to profitability.

The Fort Worth, Texas-based consumer electronics retailer chain operator’s executive vice president and chief financial officer, John W. Feray, told analysts on its Tuesday conference call following the release of results for the period ended May 3 that as of that date, the company had $62 million of cash and equivalents along with $362 million of borrowing availability under a new $585 million asset-based credit facility the company entered into in December for total liquidity of $424 million.

Feray noted that historically, RadioShack has used a portion of its credit facility for letters of credit, in turn reducing borrowing availability. He noted that as of the end of the quarter, letters of credit totaled $67.8 million, with the facility otherwise undrawn, but said that subsequent to the end of the quarter, the company drew down on the credit facility for general corporate purposes and currently has outstanding borrowings of $35 million, apart from the letters of credit.

Results impact liquidity

The CFO admitted that “our liquidity position has been negatively impacted by the operating losses over the past few years, including the losses in the first quarter.”

However, he said that after having analyzed its cash requirements, including its inventory position, other working capital changes, capital expenditures and borrowing availability under the credit facility, “we believe our current liquidity will provide the financial flexibility to continue executing our strategic turnaround plan over the next 12 months.”

But he added the caveat that RadioShack’s ability to maintain sufficient liquidity to fund its operations and execute its strategic turnaround plan “is contingent on improving the current trend in our operating results. This plan anticipates that sales and gross margins will improve over the next 12 months in the mobility [i.e., the sale of wireless phones, tablets and wireless service contracts or pre-paid minutes for such devices] and retail [sales of other types of consumer electronics] areas of our business,” based upon merchandising initiatives that it outlined.

Lenders bar store closings

Feray said one major step the company wanted to take was its previously announced plan to close up to 1,100 underperforming stores across the United States, which would leave it with about 3,000 other such outlets, plus its international operations.

However, after intense talks with its lenders on such an initiative – their consent is required under the terms of the company’s credit agreement – it was forced to announce in a regulatory filing several weeks ago that the lenders had refused to grant consent to such a move on mutually agreeable terms.

During the question-and-answer portion of the conference call that followed the formal presentations by Feray and by RadioShack’s chief executive officer, Joseph C. Magnacca, analysts tried to get the two men to elaborate on just what the lenders may have objected to in the company’s original plan or the alternative terms they offered that the company could not agree to.

However, Feray and Magnacca declined to go into any detail about that, with the CFO saying only that “the overall terms were just not mutually agreeable at the present time.”

He declared that “the best way to characterize our overall conversations with the banks is they’re very supportive. We have very solid relationships with our lenders, regardless of what is written in the press. Our lenders have worked very well with us to build a stronger RadioShack.”

In case anyone listening had not gotten his point, Feray repeated several times during the call words to that effect. “We do continue to have a strong, productive and positive relationship with our lenders and more specifically, good dialogue on this topic. Our lenders are a very important part of our turnaround strategy,” he said.

He also said, several times, that RadioShack is continuing to talk to its lenders on the issue of potential store closings.

And he and Magnacca said that in the absence of formal lender consent to the broad plan of closing 1,100 stores in one fell swoop, RadioShack still has the power under the credit agreements’ covenants to unilaterally decide to close up to 200 stores per year, or a total of 600 over the term of the credit agreement.

Feray said RadioShack plans to take advantage of that authority, “so the net result is we can achieve a good portion of our objective – just over a longer timeframe.”

Magnacca said that “we just felt that it may be a much more significant advancement for the business to be able to do that much more quickly.”

Always have a ‘plan B’

Also during the Q&A, Feray was asked what kind of contingency plan to preserve and augment liquidity the company has in the event that its operational performance does not improve in line with management’s expectations.

He replied that “obviously, these are not things that we would initially go toward, but we would make further reductions in our capital expenditures, further reductions in costs that could impact overall sales, be it rent, marketing, other cost areas there. Potentially if things did not pursue very well, we would look at raising additional capital in various ways and also reducing inventory levels, which is a key part of our overall liquidity and a big investment.

“Obviously, we would not want to do that, as it would impact sales.”

He said the company might also explore selling non-productive assets.

An analyst asked whether the company might choose to “clean up its capital structure” via a restructuring, but Feray answered that “we’re focused on executing the overall turnaround plan, and we believe that the 2018 credit agreement give us the flexibility to implement our overall strategic turnaround strategy for Radio Shack.”

As of the end of the first quarter, the company’s total debt stood at $614.5 million, all of which matures in 2018 and 2019. Besides the revolver, the capital structure included a $250 million five-year secured term loan that the company entered into last December along with the revolver as well as $325 million of 6ľ% junk bonds due 2019.

During the quarter, RadioShack’s total net sales and operating revenues were $736.7 million, down from $848.4 million last year. Comparable-store sales were down 14%, driven by traffic declines and soft performance in its wireless phone mobility business.

Its loss from continuing operations swelled to $98.3 million from $23.3 million a year ago, producing a net loss of $98.3 million, or 97 cents per diluted share, in the latest quarter, versus $28 million of red ink, or 28 cents per share, a year ago.

© 2015 Prospect News.
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