RadioShack’s Q3’15 Earnings Preview: The Company Has A Long Way To Go To Turnaround Its Business

RadioShack (NYSE:RSH), a consumer electronics retailer, will report its Q3 2015 earnings on December 11th. The company has been struggling to survive in the industry with rising competition from online retail giants such as Amazon (NASDAQ:AMZN), online auction sites like eBay (NASDAQ:EBAY), as well as other physical retailers such as Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT). In the last few years, RadioShack has been plagued by an eroding top line growth, declining gross margins, high inventory levels, a string of debt maturities and declining cash reserves. It reported its tenth consecutive quarterly loss in Q2 2014. The company’s stock price has declined drastically in the last few years, from around $10 in 2010 to less than $1 at present.

Although RadioShack claims to be making steady progress with its turnaround initiatives (which were implemented last year), it has failed to show any significant financial gains so far. The company is in the process of working with its financial shareholders to make significant reductions in its cost structure in order to provide the additional liquidity and time necessary to see the effect of its turnaround strategy. Earlier this month, the company hit another roadblock when Salus Capital Partners and Cerberus Capital Management accused RadioShack on defaulting on the $250 million loan provided by them a year ago, when it secured a separate credit line in October this year. The company denies the allegations and intends to vigorously contest them. If RadioShack is unable to reach a deal with its lenders, it will have to file for bankruptcy next month. The news has shattered investor confidence further as it comes right before the holiday season, when retailers generate a significant portion of their annual revenue.

Our price estimate of $0.86 for RadioShack is now at a significant premium to the current market price. We will update our model after the Q3 2015 earnings release.

See our full analysis for RadioShack

The Restructured Financial Deal Is The Cause Of Tussle Between RadioShack & Its Key Lenders

RadioShack announced a new financial deal in October this year, in which Standard General and certain other investors replaced GE Capital as the lead lender under RadioShack’s senior secured asset based credit facility. Restructuring a portion of RadioShack’s debt, the agreement provided the company with $120 million in additional capital as the investors, led by Standard General and LiteSpeed Management, backed a revolving line of credit. The deal was meant to give RadioShack sufficient credit capacity to fund its inventory build for the upcoming holiday season and prevent  it from going into bankruptcy.

However, RadioShack was slapped with a legal notice from Salus Capital Partners and Cerberus Capital Management accusing the company of breaching the covenants of the $250 million loan provided by them to RadioShack a year ago. RadioShack disagrees with the allegations, believes that the claims are wrong and self-serving, and intends to vigorously contest them. (Read Press Release) RadioShack executives plan to negotiate with the lenders toward a so-called “forbearance” agreement not to take action on the alleged defaults. (Read: RadioShack’s Tussle With Its Lead Lenders Can Leave The Company Bankrupt)

Business Suffers Due To Low Consumer Interest: Can New Products & Initiatives Spur Demand?

Retail and mobility are the two key platforms that RadioShack uses to measure its business. The company claims to be making progress in its retail segment, which accounts for 50% of the sales. It is seeing customers respond positively to the key elements of its turnaround strategy such as the actions it has taken (so far) on reinvigorating the store experience, revamping product assortment and creating a stronger inventory position. However, RadioShack continues to suffer in the mobility segment, which accounted for more than 75% of the decline in sales in Q2 2014.

Radioshack is witnessing fundamental challenges in its mobility business and is working hard to optimize profitable transactions in this segment. The mobility unit is suffering because of the low consumer interest in the current assortment of handsets, the aggressive promotional environment on these products and intense wireless carrier marketing activities. Customers have delayed purchasing or upgrading their phones, which in turn has led to further aggressive price competition on existing handsets among the wireless carriers and other retailers.

RadioShack claims to be addressing the above problems head-on by focusing on profitable sales. It is improving the technology it uses to sell mobile phones and bringing in new wireless offerings. The mobility market has been soft for a number of quarters, but Radioshack expects that new products from key vendors will spur demand in the future. The company’s ‘Fix It Here’ Program can provide RadioShack with the much-needed financial hedge as it tries to rebuild its mobility business. (Read: RadioShack’s Expanding ‘Fix It Here’ Footprint Can Help Increase Its Customer Base)

Revamped Website Can Help Better Cater To The Upcoming Holiday Demand

Last month, RadioShack relaunched its website (www.radioshack.com) with new features that help customers get great prices on all the latest technology. While e-commerce has exploded in the past decade, RadioShack’s online sales have declined more than 20%. According to the E-commerce news site Internet Retailer, RadioShack had the third-largest decline in Web sales over the past decade. RadioShack outsourced its online business for many years, but has now shifted it in-house. Leveraging online sales is an important factor that can help drive future growth for brick-and-motor stores. RadioShack’s online sale account for less than 1% of its revenue.

Reinvigorating its online platform can help RadioShack increase the proportion of revenue it earns from its online platform. With the latest update, the company has completely changed the look of RadioShack.com, with a shift to a clean, uncluttered site design that is organized more by interest, category, theme or seasonal topics. The site also features dynamic merchandising capabilities, enabling RadioShack to deliver quicker product and inventory updates. Additionally, the new RadioShack.com features real-time pricing functionality that allows the company to make quick price adjustments to meet and beat pricing comparisons with major online retailers as well as other brick-and-motor stores. If customers find a better price on the front page products, like Beats Solo HD headphones for $69.99, RadioShack promises to match the price and take an additional 10% off if the customer brings a competitor’s printed ad into the store. RadioShack has lowered its prices on thousands of online items and hundreds of private-label items and its own AUVIO line of sound products.

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