May 9, 2014

RadioShack stock sinks as closings are scaled back

The struggling electronics retailer said it will close fewer stores than planned after it could not gain consent from major lenders.

Shares of RadioShack sank nearly 10 percent Friday as investors took a sour view of the struggling retailer’s announcement that it would have to scale back plans to close up to 1,100 stores.

Moody’s Investors Service called the news “credit negative” since most of the stores being targeted for closure are underperforming. And some analysts wondered whether a dispute with lenders over how many stores should be closed could lead to a bankruptcy filing.

“Not being able to get the necessary waivers from their banks effectively sends RadioShack management back to the drawing board on formulating a turnaround plan — and time is increasingly not on their side,” Anthony Chukumba, an analyst at BB&T Capital Markets, told The New York Times.

“That said, this is also a bit of a game of chicken. If the banks play hardball too much, RadioShack may end up being forced to file for Chapter 11 bankruptcy, which will leave the banks fighting over the scraps.”

In March, RadioShack disclosed plans to close up to 1,100 of its 4,300 company-owned stores after posting disappointing holiday sales and a $191.4 million fourth-quarter loss.

But late Thursday, RadioShack said in a filing with the Securities and Exchange Commission that the terms required by lenders to gain consent for its store-closing plan “are not acceptable.” The company had said that its loan agreements required it to get lenders’ approval to close more than 200 stores a year.

In its filing, RadioShack said it will move forward with a plan to close fewer stores and seek other cost reductions. Its stock (ticker: RSH) closed down 14 cents at $1.33 on Friday.

Michael Pachter, an analyst with Wedbush Securities, said the disagreement with lenders could make a bankruptcy filing more likely.

“If RadioShack is bankrupt, the creditors run the show, and the terms they sought that were unacceptable to management will suddenly become acceptable,” Pachter said in an email response to questions.

Under CEO Joseph Magnacca, who joined the consumer electronics retailer last year, RadioShack is trying to reverse declining sales as customers shift their business to competitors including websites, phone companies and big-box retailers. The former Walgreen executive has overhauled the management team, lined up new financing and opened a series of concept stores.

But RadioShack lost $400 million last year, and its sales declined by 10 percent. It ended the year with $179.8 million in cash and cash equivalents, as well as $374.5 million from its major credit agreement.

The company doesn’t expect to report first-quarter earnings until the first or second week of June. It has scheduled its annual shareholders meeting for June 3 at the Norris Conference Centers in downtown Fort Worth.

This report includes material from The New York Times.

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