RadioShack reports big loss, will close up to 1,100 stores

RadioShack announced a major retrenchment Tuesday, saying it will close as many as 1,100 stores after dismal holiday sales resulted in a $191.4 million fourth-quarter loss.

The store closings, amounting to about one of every five RadioShack locations, mark the most dramatic move yet by a new management team struggling to rejuvenate the company’s image and business.

Sales for the last three months of 2013 declined by 20 percent, affected by bad weather, fewer shopping days between Thanksgiving and Christmas and inventory mistakes.

Joseph Magnacca, who has been trying to retool the chain’s stores since taking over as chief executive officer a year ago, told analysts on a conference call: “We tried to do too much too quickly.”

Wall Street punished the company’s already beleaguered stock (ticker: RSH) on a day when the overall market rallied, sending it down more than 17 percent to $2.25 a share. And analysts said they see more strong headwinds ahead for the company.

“Mr. Magnacca and the new team deserve a lot of credit for the changes they are making, but it seems harder and harder for them to overcome the more significant obstacles,” David Strasser, of Janney Capital Markets, wrote in a research note.

The company blamed its poor results on “a holiday season characterized by lower store traffic, intense promotional activity particularly in consumer electronics, a very soft mobility marketplace and a few operational issues.”

Speaking with analysts, Magnacca also cited poor execution in removing duplicate merchandise from stores. The CEO cited the mistake of removing 100 items with sales potential from the stores and said there was insufficient stocking of some higher-margin, house-brand items.

Some stores targeted for closure may stay open if landlords lower the rent to a level where the locations would be profitable, Chief Financial Officer John Feray said.

Magnacca said the decision to close up to 1,100 under-performing stores — about 20 percent of the chain’s 4,297 locations — was the result of a comprehensive strategic review that considered factors including “location, area demographics, lease life and financial performance.” After the closings, the retailer will continue to have more than 4,000 stores, including over 900 dealer franchise locations, the company said.

Asked if the store closings would leave market gaps, the CEO told analysts that some areas were grossly over saturated, noting that in Fort Worth there are five RadioShack stores located within five miles of his home.

Feray noted that its current agreement with lenders requires their approval for more than 200 store closings a year, or 600 over the life of the agreement. But the CFO did not indicate that securing their permission was a major hurdle. A Wall Street Journal blog later reported that loan covenants will require the chain to pay $15,000 — as much as $16.2 million — to lenders for each store that closes. RadioShack did not comment on the report.

Feray said closing costs would be more than covered by proceeds from inventory sales, and he said RadioShack might engage one or two liquidating firms.

And the company is not running out of cash. It ended the quarter with $554.3 million liquidity, including $179.8 million in cash and cash equivalents and $374.5 million from its major credit agreement. So far, it has used only $55 million for letters of credit.

But the fourth-quarter loss was three times bigger than in 2012, when the company lost $63.3 million in the fourth quarter. For all of 2013, RadioShack posted a net loss of $400.2 million, or $3.97 per diluted share, compared to net loss of $139.4 million in 2012. Sales for the year totaled $3.43 billion, down 10 percent, and same-store sales declined by 8.8 percent.

The news wasn’t good in Mexico either, where fourth-quarter sales at company-owned stores dropped 10 percent, prompting RadioShack to take a $24 million impairment charge on their overall value, Feray said. He also said the chain initiated a management shakeup in Mexico.

Magnacca, a former Walgreens executive, has overhauled the company’s management team, lined up new financing deals and opened a series of concept stores, including one in Sundance Square, with a new design and streamlined inventory.

Despite the poor performance, he repeatedly expressed confidence that RadioShack will accomplish its revitalization plan. “Our turnaround plan is on track,” he insisted.

He cited the new executive hires and the retailer’s acclaimed Super Bowl TV ad that poked fun at itself by featuring 1980s celebrities to highlight its new concept stores where staff would better serve shoppers than at rival big-box stores. The CEO noted new product development, both in-house and with fledgling innovators, whose new items, he said, will play a big role in the chain’s turnaround. He added that some 100 stores would be getting 3-D printers.

But analysts have their doubts.

RadioShack, Janney’s Strasser wrote, “is highly dependent on wireless, and now as that industry matures, it makes results that much more challenging. The simple math is that gross profit was $288 million in the fourth quarter versus (overhead costs) SG&A dollars of $389 million.

Strasser said RadioShack’s news release “reads like Circuit City’s releases of 2008” before they filed for bankruptcy — some wins, but results overwhelmed by a broader economic malaise. “Granted the 1,100 store closures will shrink [expenses], but not enough to overcome the sales decline,” Strasser said. “At the same time, the cost of closing these stores will hit their liquidity even more.”

RadioShack’s new concept stores “are great, but simply not enough,” the analyst said in his research note. “A handful of those stores will not warrant survival of the whole company in our humble opinion.”

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