RadioShack Tumbles, Fitch Lowers Rating

Zacks

Beleaguered electronic retailer RadioShack Corp. (RSH) was dealt yet another blow. The rating firm Fitch Ratings downgraded the company’s long-term issuer default rating to “CC” from “CCC,” which is close to the lower end of junk zone. The company’s shares have declined 9% following the news.

According to Fitch, the major reasons for this downgrade were decreasing liquidity, widening losses and the recent disagreement between the company and its lenders on the store closure plan.

In March, RadioShack had announced its plans to shut down 1,100 unprofitable outlets after the company reported dismal numbers for the eighth consecutive quarter. However, the company failed to accomplish its set target, after two of the company’s major creditors decided against supporting the planned closure number. The company’s credit agreement allowed the wind-down of just 200 stores without the approval of its two major lenders, namely, Salus Capital Partners and GE Capital.

Following a drastic fall in the company’s cash position, Fitch Ratings has also expressed its concern over RadioShack’s ability to operate its business after 2014. At the end of 2013, RadioShack had $179.8 million in cash and cash equivalent compared with $535.7 million at end-2012. Long-term debt was $613 million versus $499 million at the end of the previous year. We believe high interest payment and maturity of $300 million debt in the next three to five years will further exert pressure on the company’s cash position.

Earlier, all the three major credit rating agencies, namely the S&P, Moody’s and Fitch, had downgraded RadioShack with negative outlooks. The S&P has pulled down RadioShack’s corporate credit and senior unsecured debt ratings to “CCC“ from “CCC+”. The outlook remains negative. Moody’s slashed RadioShack’s corporate family rating to “B3” from “B1”. Moreover, Fitch Ratings downgraded the company’s long-term issuer default rating to “CCC” from “B-“.

Notably, over the last one year, the stock price of RadioShack has plummeted 70%. Declining foot traffic has severely affected RadioShack’s business in recent times, as consumers now prefer purchasing online rather than visiting stores. In the last concluded quarter, the company reported loss per share of $1.29 which was significantly wider than the Zacks Consensus Estimate of a loss per share of 16 cents. Total revenue grossed $935.4 million, down 20.1% year over year, also lagging the Zacks Consensus Estimate of $1,130 million.

Furthermore, RadioShack is facing intense competition from larger rivals like Best Buy Co. Inc. (BBY) and Wal-Mart Stores Inc. (WMT). Best Buy is gradually rolling out small mobile stores and plans to open 600 to 800 stores within 5 years, which in turn, might negatively impact RadioShack’s market share. RadioShack is also facing stiff competition from the online retail major, Amazon.com Inc. (AMZN).

RadioShack currently carries a Zacks Rank #5 (Strong Sell).

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