Breakout

The future of 'Zombie' RadioShack

Jeff Macke
Breakout

Shares of RadioShack (RSH) were getting hit earlier this morning after the company reported much weaker than expected results. Specifically, the electronics retailer lost $98.3 million or 97 cents a share on shrinking revenues. Analysts had been looking for a loss of 52 cents. The chain blamed weak wireless sales and promotional pricing, but the real questions are about RadioShack's future.

As discussed back in April, the chain’s chances at long-term survival took a substantial hit when its creditors took the unusual action of rejecting an already announced plan to close 1,100 of the existing 4,300 stores.

The flip-flop on RadioShack’s plans to close stores spoke to the heart of what plagues the chain. CEO Joseph Magnacca felt that the best way for the company to rebuild was to close stores and focus on remodelling. Creditors objected because it takes money to close locations. Leases would have to be bought out, inventories moved and other substantial hits to cash flows would be incurred.

Creditors ultimately don’t care about RadioShack’s survival. They’re more interested in what the chain is worth if it gets liquidated. The creditors view RadioShack as being worth more if expenses are minimized and the chain is run with the goal of maximizing cash flow rather than long-term health.

As a rule of thumb for investors, when the debt holders start getting involved in day-to-day operations, it’s bad news for shareholders. Sure enough, the stock is down 25% since management’s turnaround plan was rejected.

“One self-deprecating commercial is not a business model,” says Mike Santoli in the attached clip. “They don’t really have an ability for how to turn the business around. They have this idea for private-label products. They don’t have the cash to make that happen.”

Related: RadioShack ads make promises the stores can’t keep

Unfortunately for everyone involved RadioShack has entered a sort of undead ‘zombie’ retailer state. The company is being run for cash flow and liquidity. Since the debt holders don’t want to close existing stores and pay out for lease obligations, you’ll still see RadioShacks on the corner but they’ll likely continue to deteriorate. The company hasn’t officially stopped remodelling stores but it’s only a matter of time.

It’s a sad ending for a once-proud chain.

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