RadioShack: New Financing Buys Some Time, But Not Much

| About: RadioShack Corporation (RSH)

RadioShack (NYSE:RSH) has released results for the third quarter, and it is clear that the business continues to deteriorate. The company incurred a net loss of $112.4 million during the quarter, up from a net loss of $47.1 million in the prior year period. Management also announced committed financing from GE Capital, consisting of a $585 million credit facility and $250 million term loan, which will be used to refinance $175 million of existing loans and cancel the existing $450 million revolving facility. In total, the company expects the new financing to add $175 million of incremental liquidity.

Continued Run Down of Inventory

RadioShack has been reducing SKU count for several quarters now to streamline the stores and raise cash, and this quarter accelerated the strategy. The inventory balance was reduced from $825.8 million at June 30, 2013 to $707.7 million at September 30, 2013, which is lower than at any point in the last several years. In addition, the rundown included a liquidation of a substantial amount of inventory removal as part of the company's repositioning strategy, which accounted for an estimated $47 million of the reduction in gross margin.

Normalized Cash Burn Runrate

As reported (see 10-Q) results on a GAAP basis (in millions):

Gross Profit $242.7
Less: SG&A $343.3
Less: D&A $15.0
Less: Impairments $2.4
Operating Loss $118.0
Less: Net Interest Expense $11.2
Plus: Income Tax Benefit $16.8
Net Loss $112.4

In the chart below I have normalized for one-time expenses, including the one-time inventory disposition, and non-cash items, including depreciation and amortization and impairments, to estimate a cash burn run-rate for the quarter (in millions).

Gross Profit ($242.7 plus $47 effect of one-time inventory disposition) $289.7
Less: SG&A $343.3
Less: Capital Spending (substituted for D&A)* $14.9
Less: Net Interest Expense $11.2
Plus: Income Tax Benefit (estimated similar going forward) $16.8
Normalized Cash Burn $62.9

* Capital spending for the first nine months of 2013 was approximately $26 million. Management estimates between $45 and $55 million of capital spending for the full year, leaving $24 million of expenditure in the fourth quarter based on the mid-point of the range. See 10-Q.

These calculations show a normalized cash burn rate of $62.9 million for the quarter before working capital movement.

Working Capital

While working capital has been a net cash provider now for several quarters, it is very unlikely that this will continue. Inventory balances of $707.7 million is significantly lower than at any point in the last several years and management indicated on the conference call that the reduction in SKUs is nearly complete.

Accounts payable increased from $200.7 million to $282.1 million, an increase of $81.4 million. Accounts receivables decreased from $218.5 million to $201.6 million, a decrease of $16.9 million. Together the accounts payable and receivables movements accounted for a $98.3 million working capital benefit during the third quarter. See 10-Q.

While the working capital benefit from lower SKU count and thus reduced inventory balances is sustainable and unlikely to reverse, working capital benefits from increases in accounts payable and decreases in accounts receivable are not likely to be sustainable unless the retailer is in a strong position to extract sustainably better payment terms. RadioShack does not have that kind of bargaining power and that raises questions about the sustainability of the $98.3 million cash benefit from accounts payables and receivables movements.

Total working capital movements accounted for $305.7 million of cash inflow during the nine months ended September 30, 2013. See 10-Q. Management has done a great job at wringing cash out of working capital. But now inventory and accounts receivables are substantially lower than at any point in the last several years and it is unlikely that there is more runway here.

Incremental Liquidity

Management expects an incremental $175 million of incremental liquidity from the new financing. The new $835 million of liquidity, consisting of a $585 million credit facility and $250 million term loan, will be used to refinance $175 million of existing loans and cancel the existing $450 million revolving facility. The difference between sources and uses is $210 million, indicating around $35 million of prepayment fees, commitment fees, transaction expenses and/or OID. This is an expensive refinancing.

The incremental liquidity largely comes in the form of additional revolving capacity ($450 million to $585 million) rather than incremental term loan funding ($175 million to $250 million). Retailers under threat of supplier runs like RadioShack and JC Penney (NYSE:JCP) are unlikely to be able to rely on revolving borrowings for more than a few months as suppliers become very nervous if revolving borrowings increase. After all, both RadioShack and JC Penney have large undrawn revolving facilities that have not taken supplier concern off the table.

The more important incremental liquidity is the additional $75 million of term loan funding. Subtracting out the rough $35 million estimate of transaction expenses leaves the company with an additional $40 million of non-revolving funding. And that is in the context of a $63 million normalized quarterly cash burn rate.

We do not yet know the terms of the new financing but I also expect that there will be significant conditions on borrowings under the new revolving facility. It will be interesting to see what is agreed, but it is hard to imagine that the lenders will not place significant restrictions on revolving borrowings considering the underlying business results.


The company is taking positive steps to reposition the stores and brand. The cash balance of $316.4 million and incremental liquidity from the new financing of $175 million will provide some time and capital to work through the repositioning. And we are now in the strongest quarter of the year.

But storm clouds are on the horizon. Only $40 million of the $175 million of additional liquidity seems to be funded term debt after $35 million of estimated transaction expenses. Cash inflows from accounts receivables and payables are likely to reverse in part after a $98.3 million inflow from accounts receivables decreasing and accounts payable increasing during the quarter. With a normalized cash burn rate of $62.9 million per quarter it is very likely that RadioShack will raise additional equity capital sooner rather than later.

Disclosure: I am short RSH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.