Fitch Sees RadioShack (RSH) with Limited Options to Stem Liquidity Issue; May Downgrade Further
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RadioShack's (NYSE: RSH) weak first quarter results underscore the material challenges in its core business segments with few options left to stem the declines given a tightening liquidity situation, according to Fitch Ratings.
Sales for the first quarter fell 13% to $736.7 million, reflecting significant pressure within its mobility platform, which was down 19%, and its retail platform (consumer electronics and other items) which was down 9.4%. At the same time, the gross margin was down 370 basis points due to the promotional nature of the mobility market. These results were below Fitch's expectations.
EBITDA at negative $227 million for the 12 months ended May 3, 2014, was materially lower than the negative $161 million in 2013 and positive $48 million in 2012. In Fitch's view, EBITDA declines are expected to continue given weak underlying mobility and consumer electronics markets.
RadioShack's liquidity is dwindling. Fitch expects negative free cash flow of $200-$250 million over the balance of 2014, which, together with seasonal inventory build-up of $100-$150 million, would substantially eat into the company's total liquidity of $424 million as of May 13, 2014. This liquidity was comprised of cash of $62 million and revolver availability of $362 million (after $68 million in letters of credit) and was down from liquidity of $554 million at year-end 2013. Management indicated that it drew on its revolver to fund operating losses post quarter-end and that $35 million was outstanding on the revolver as of June 9, 2014.
Fitch believes RadioShack does not have material sources of liquidity beyond its revolver, as virtually all of its assets have been pledged to its credit facilities. Fitch expects excess liquidity to be very tight as we approach peak seasonal borrowings, which could prompt a restructuring before year end.
Absent an agreement with its lenders, it appears that RadioShack will only be able to close 200 stores in 2014, down from its earlier plan to close up to 1,100 stores. In Fitch's view, closing fewer stores will be a drag on profitability and, more significantly, free cash flow, as it will not provide the much-needed funds from inventory liquidation that RadioShack was anticipating.
Fitch downgraded the long-term issuer default rating for RadioShack Corp. to 'CC' from 'CCC' on May 15, reflecting the increasing likelihood that RadioShack will need to restructure its debt within the next 12 months. A further downgrade to 'C' would signify that Fitch believes a default at RadioShack is imminent. This would be reflected by further strain on RadioShack's cash flow and liquidity that impedes the company's day-to-day operations.
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