RadioShack stock tumbles after $112 million third-quarter loss

Posted Tuesday, Oct. 22, 2013  comments  Print Reprints
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RadioShack shares tumbled nearly 18 percent on Tuesday after the company reported a wider-than-expected third-quarter loss amid a continuing slide in sales.

Some of the loss — the company’s seventh straight quarter of red ink — was blamed on selling redundant merchandise at a loss through third-party liquidators to unclutter its stores. But the company’s new chief executive, Joseph C. Magnacca, said changing the inventory in its electronics stores is essential. And the company confirmed a new financing deal to help fund its turnaround.

“We can’t fix our business without fixing our product assortment,” Magnacca told analysts during a conference call, saying that he never expected a smooth turnaround for the struggling electronics chain.

Magnacca, who took over in February, expressed confidence that the changes he is making to the stores — including leaner selections, better margins on private-label brands and trendy products like headphones pitched by tennis star Serena Williams — will help revitalize the Fort Worth-based chain.

But, he cautioned, “repositioning our brand won’t happen overnight.”

RadioShack said its net loss was $112 million, more than double the $47 million loss reported a year ago. Sales totaled $805 million, compared to $898 million last year, including a 8.4 percent decrease in sales at stores open at least a year.

RadioShack stock (ticker: RSH) closed down 63 cents a share at $2.89.

Selling off unwanted merchandise and reducing category items was recorded as a $47 million markdown. Sales dropped in each product platform although it saw higher sales of prepaid mobile phones and in certain signature categories including portable speakers. And the company saw improved sales at new concept stores in New York and elsewhere.

RadioShack also said it has received commitments for $835 million of new five-year debt financing. The deal, first reported by The Wall Street Journal on Monday, will help RadioShack replace its existing $625 million credit facilities and provide additional cash needed for its turnaround efforts.

“The announcement of new financing from GE has the potential to be a game changer and buys them potentially significant time to enact the turnaround,” commented David Strasser and Sarang Vora, analysts from Janney Capital Markets.

The lenders include GE Capital, Salus Capital Partners, CIT Group and Royal Bank of Scotland Group. But Magnacca declined to release the interest rates it will pay, saying details have not yet been worked out with all of the lenders.

RadioShack has been losing money as its customers defect to big box retailers such as Best Buy and online competitors including Amazon.com.

“We are moving forward quickly and as planned with our turnaround efforts. As we have said, we expect our work to take several quarters and during that time our results will vary quarter to quarter as we make strategic changes to improve our long-term financial performance,” said Magnacca.

Magnacca said the company is making changes to its stores this fall.

“By the end of the year, we will have over 100 concept and brand statement stores open,” he said. “In addition, we are currently contemporizing our stores by significantly re-merchandising inventory in a more logical manner and improving presentation. Our entire store base of nearly 4,300 stores will see improvements from these changes which are being implemented in the early part of the fourth quarter.”

Magnacca, a former executive with Walgreens, said in July that he had hired turnaround adviser AlixPartners and investment bank Peter J. Solomon to explore refinancing debt.

Standard & Poor’s, which downgraded RadioShack’s debt to CCC in August, said Tuesday that it would not reconsider its rating or negative outlook until it learns the terms of the new financing agreements. “Nonetheless, the company’s poor operating trends may limit any rating upside,” the agency said.

Janney’s Strasser and Vora said RadioShack is attempting to overcome “some self-inflicted wounds,” adding that store traffic has been problematic.

“On the flip side, Mr. Magnacca has a strategy, some financing, and a new team in place to execute,” they said in their research note. “There are, however, structural headwinds as the company struggles to both retain and attract new customers, and we don’t really know the terms of the financing it just secured.”

Separately, the company said it hired Paul Rutenis as senior vice president, chief merchandising officer, and Janet Fox as senior vice president of global sourcing. Rutenis joins RadioShack from J.C. Penney, where he served as senior vice president, general merchandising manager for the Home division. Fox has spent almost 30 years in retail sourcing, most recently as a senior vice president at Under Armour.

Magnacca said that changing sales incentives since April to cover all merchandise it sells has created a better shopping experience for consumers. Before that, sales staff were given commissions only on mobile phones, which have been reduced from roughly 30 to 35 percent of store space to 25 to 30 percent, he said.

By the end of the year, about 100 of RadioShack’s 4,300 company-owned stores will get major makeovers in one of three formats. And most of the remaining store will receive some changes.

As an example of reduced products in the stores, Magnacca said the number of different soldering kits was down to five from 17.

“We obviously took some markdown,” he said of the loss incurred. “Our focus was to clean out the inventory and set ourselves up for a great holiday season (with a) target date of Nov. 1.”

Barry Shlachter, 817-390-7718 Twitter: @bshlachter

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