RadioShack Surges 19% on Possible Bankruptcy Rescue Plan

Shares of the beleaguered electronic and mobile products retailer, RadioShack Corp. (RSH), shot up more than 19% yesterday after Bloomberg reported that the company is in talks with its shareholder Standard General LP regarding rescue financing.

In order to avoid Chapter 11 of bankruptcy proceedings, the company is trying to formulate a plan in association with Standard General. The latter is trying to boost RadioShack’s cash position by issuing equity or debt.

Of late, RadioShack has undertaken several strategic moves to make a turnaround. Management is focusing on reducing costs, which includes closing up to 200 stores every year over the next three years; lowering rent expense through negotiations with landlords; reducing compensation expense by optimizing labor hours and store operating hours; and reviewing other expenses to identify cost-reduction opportunities.

Unfortunately, none of these methods has produced any effective results. At present, major concerns for the company are its decreasing liquidity, widening losses and disagreements with its lenders over the store closure plan.

In the last reported first quarter of fiscal 2015 RadioShack’s revenues declined 13%, gross profit dropped 21% and adjusted operating loss soared by a whopping 700% from the comparable prior-year period. At the end of the quarter, the company had just $62 million in cash and $1.2 billion in debt and short-term liabilities.

Moreover, comparable store sales for company-operated stores and kiosks (stores and kiosks that have been operational for at least a year) were down 14% in the last reported quarter. This is a key retail performance indicator measuring growth from the existing sales locations. Weaker-than-expected performance by the company has resulted in the steep fall of the company’s shares, which have plummeted more than 70% in the past one year.

RadioShack’s core consumer electronics (including digital TVs, digital music players, and digital cameras) retail business is on a secular downtrend and is unlikely to recover in the near future. Loss of foot traffic is taking a toll on RadioShack’s mobility business – a parameter on which the company had been banking for its future growth.

We believe it might be difficult for RadioShack to make a turnaround in its business owing to stiff competition from retail giants like Inc. (AMZN), Best Buy Co., Inc. (BBY) and Conns Inc. (CONN).

RadioShack currently has a Zacks Rank #3 (Hold).

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