Analyst: The RadioShack ‘Ship Is Sinking’

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Thursday, RadioShack (NYSE:RSH) announced that it was unable to successfully negotiate consent from its lenders under the 2018 Credit Agreement and 2018 Term Loan to close up to 1,100 stores. The terms offered by lenders were not acceptable to the company. RadioShack may continue to negotiate with creditors but currently intends to continue with a revised plan to close fewer stores and pursue other cost reductions permitted by the current credit agreements.

RadioShack’s operational decisions are now being vetted by creditors. The “bright spot” of Q4:13’s earnings release was that the company intended to close up to 1,100 stores during FY:14, subject to the consent of its lenders. That last clause should send shivers down the spines of equity investors, as they are no longer relevant to management decisions — the creditors clearly are in control of the ship, and in our view, the ship is sinking. The company is already in negotiations to modify terms of a credit agreement that was put into place less than half a year ago. The current credit agreement allows for RadioShack to close up to 200 stores per year, or 600 over the life of the credit agreement. In our view, the operating situation at the company has deteriorated at an accelerating pace, making more store closures than anticipated required for positive cash flow.

Reiterating our UNDERPERFORM rating and 12-month price target of $1 as losses grow from declining CE sales and continued margin erosion, compounded by continued investments to spur growth. Our price target reflects our best estimate of the brand equity and going-concern value for the business (around $300 million), net of the company’s net debt.

Risks to attainment of our share price target include changes to the macroeconomic outlook, variability in new product release timing, the effects of competition from other consumer electronic and big-box retailers, and changes in consumer demand for consumer electronics.

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