RadioShack (RSH), a chain of electronics stores, has garnered a lot of bearish attention from investors, which is reflected in its high short ratio (16 days) and share price, which is down 75% YTD. The reason for this has been its declining margins and bottom line. Its increasing mobility platform sales alone cannot save the company, since margins are low. The company also faces competition from Amazon (AMZN) and Best Buy (BBY), and the management has been criticized for its efforts to turn around the company. We recommend investors to stay away from RSH and the lack of a positive catalyst.
Among the latest news on RSH, the company announced that James Gooch will step down as CEO and director, effective immediately. The company's CFO and Executive Vice President, Dorvin Lively, will take up the position until the Board of Directors finds a replacement. Today, the stock is up 2.5%, however, it remains to be seen whether they can find a person with retail experience, and whether someone would want to come to the helm of a struggling company.
In the last two quarters, the company was not profitable. There were large negative earnings surprises of 260% and 800% in Q1 and Q2, respectively. The total cash per share of $5.21 is still more than its share price of $2.4/share. However, this cash can be burnt quite rapidly if the company's profitability continues to decline. Analysts expect a $27.2 million loss this year, according to Bloomberg.
The company's stores are divided into three platforms: mobility (handsets, tablets, e-readers), signature (home entertainment and music accessories), and consumer electronics (like computers, televisions). Only sales from the mobility platform have shown an increase of 3.3% in Q2 due to postpaid wireless and tablet sales. The Signature platform had flat sales YoY, while consumer electronics showed a decline of 26.5%. Overall, comparable store sales were almost flat, but gross margins declined 16% for Q22012. The company plans to focus on the mobility segment, whose sales have increased from 33.8% of total revenues in 2009 to 51% in 2011. The mobility platform's margins face pressure due to large demand for low margin Apple (AAPL) iPhones, and competition from Best Buy's smaller stores, which mainly focus on mobiles. The company also faces competition from the e-commerce giant, Amazon .
Apart from the stores, the company reports results in an "other" category as well, which includes its website, Target mobile stores, independent dealer sales, and its Mexican subsidiary. It formed 19% of Q2 sales.
The company had announced with its Q2 results that it will stop paying dividends so that it can plough back the cash in reducing its debt. The company currently has a total debt-to-equity ratio of 96%, with an interest coverage ratio of 7.3 and operating cash flow (trailing twelve months) of $139 million. $375 million 2.5% convertible notes that were issued to institutional investors will mature in August 2013. The company intends to pay some of this amount out of its cash, while refinancing almost half of it. The conversion option for these notes is exercisable from May 1, 2013. A $1,000 principal note will be convertible to 42.0746 shares of common stock. The company also has notes maturing in 2019.
RSH has announced that it has secured a $100 million 5-year secured loan from Wells Fargo Capital Finance, carrying an interest rate of 11%, and $10 million/year prepayment structure being allowed. The capital expenditure is expected to be in the range of $70-90 million.
The next 5-year growth rate for earnings is -44% (In last 5 years the company's bottom line has squeezed by more than 11% on an annual basis). The street is not expecting any growth in the top line as well.
The short ratio of 16 days with 41% of the float short can lead to a short squeeze if a small positive catalyst occurs. Moreover, the company's fastest growing mobility platform faces margin pressures and competition.