Fitch: No Sign of Turnaround at RadioShack

Business Wire

NEW YORK & CHICAGO--(BUSINESS WIRE)--

RadioShack's weak third-quarter results underscore the challenge in producing a turnaround in the company's operations, according to Fitch Ratings. The company Tuesday reported an 8.4% comparable stores sales decline and a nearly 800-bp gross margin contraction.

The third-quarter weakness is a partly a function of inventory clearance, which will enable the company to have cleaner stores as it moves into the holiday season. However, RadioShack is still in the early stages of expanding its merchandise offerings in growing categories such as headphones and portable speakers, and sales from these categories will not likely be sufficient to offset the secular declines in the company's existing mobility and consumer electronics businesses for at least the next 12 months.

EBITDA was negative $69 million in the 12 months ended Sept. 30, 2013, and Fitch estimates it will be in the negative $80 million to $100 million range for the full year. Broadly assuming annual capex of $50 million and interest expense of $40 million, as well as some benefit to working capital from the planned inventory reduction, free cash flow (FCF) could be in the negative $100 million range for the full year.

RadioShack's liquidity will be sufficient to cover this expected negative FCF and a fourth-quarter seasonal working capital swing estimated at $150 million to $250 million. As of Sept. 30, 2013, available cash stood at $316 million and revolver availability was $296 million. In addition, the company has obtained commitments for new five-year debt facilities that will provide $175 million of incremental liquidity in the form of new term loans and revolver capacity.

However, the incremental cash liquidity may only serve to offset the higher losses incurred during the second half of the year, leaving the company's liquidity position unchanged or only modestly improved at the end of 2013 versus Fitch's prior expectations. Looking beyond 2013, FCF could continue to track at negative $100 million or more annually, and this will gradually eat into the company's cash liquidity.

Pro forma for the new financing, the company's nearest debt maturity will occur in 2018 when the new $585 million senior secured ABL credit facility and new $250 million secured term loan will mature. The only other component of RadioShack's debt structure is a $325 million senior unsecured note issuance that matures in May 2019.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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