If you have followed the RadioShack Corp. (NYSE: RSH) saga for very long, you may be less surprised than those investors and shoppers who think a turnaround is possible on what you are about to hear. This is one of those turnarounds that just is not able to turn around. RadioShack looks to be running out of cash.
A fresh ratings agency report from Moody’s is yet one more data point that supports how and why RadioShack is likely doomed. Moody’s rates RadioShack with a Caa2 rating, and it covers it with a Negative Outlook. This puts it only two notches away from being in a credit default D rating category. We might even say that it is only a notch-and-a-half because of that Negative Outlook.
What Moody’s is alerting readers of only echoes what we and what other ratings agencies have been saying. This company looks doomed. We warned that a bankruptcy reorganization was the least of shareholder worries. This likely will be a liquidation or takeover by the creditors, and shareholders look as though their best bet at this point is a future tax write-off.
Moody’s warns of RadioShack’s deteriorating liquidity, giving it a limited window to execute a turnaround in sales and earnings. Moody’s even named its report “RadioShack Liquidity Runway May Not Be Long Enough for a Turnaround.” How comforting is that?
Moody’s points out that RadioShack’s liquidity is adequate for another year, with no debt maturities coming due. The agency’s outlook is that the base case scenario is for RadioShack to burn through its liquidity by the end of October 2015. Mickey Chadha, a Moody’s Senior Analyst, was even quoted saying:
The company’s deteriorating liquidity profile and dismal earnings give very little cushion to RadioShack to execute its turnaround strategy over the next several quarters. Absent a credible turnaround strategy to improve sales growth and increase earnings, RadioShack will be hard pressed to remain relevant in the increasingly competitive mobile phone and consumer electronics business.
RadioShack’s most recent cash balance was $62 million, versus $180 million on December 31, 2013. Now it is expected to eat up its unrestricted cash balances with operating losses and negative cash flow. Another warning is that RadioShack will start to lose vendor support. Moody’s sees the troubled retailer’s sales falling 7.4% in 2014, creating a total burn rate of about $401 million in cash for its year.
Moody’s did outline a potentially more optimistic scenario where sales fall by “only” 4.6% in 2014. In this scenario its cash burn falls to $267 million in 2014 and about $142 million in 2015, with liquidity of close to $338 million for 2014 and $196 million for. Still, the less negative case projects that EBITDA remains negative through fiscal 2015.
On June 20 we gave our final warning to holders that this was now well into the no-recovery scenario phase of its business cycle. Then we followed up with its outlook as a penny stock. RadioShack’s problem is that it waited too long to enact a turnaround, after it was able to find absolutely no acquirers. Its relatively new CEO has a retail pharmacy background, yet you cannot even pick up a Viagra or Lipitor prescription at RadioShack when you go to find a replacement for record needles.
It sure seems as though Moody’s was being nice, measured and even diplomatic in its assessment of RadioShack. Fitch’s take in May already pointed to a debt restructuring as the most likely scenario. We have been warning of that for far longer.
Again, time is running out at RadioShack. Its stock is down to $0.75, and our latest outlook is that RadioShack could get delisted from NYSE trading.