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RadioShack Looks To White Knights To Stave Off Sale, Or Insolvency

FORT WORTH, TEXAS — With losses mounting and cash reserves dwindling, RadioShack is now pinning its hopes on a potential pair of white knights to provide a fresh capital infusion.

The alternatives, the troubled CE chain said in a 10-Q filing, are selling the company, forming a partnership or seeking an out-of-court restructuring. Each would likely include store closings and debt restructuring.

As it stands, however, the company may not have sufficient cash and working capital to fund operations “beyond the very near term,” it warned, and short of those options, a voluntary Chapter 11 filing or, worstcase scenario, Chapter 7 liquidation could follow.

“It’s clear that the current pace of our turnaround is simply not fast enough to address our near-term liquidity needs,” beleaguered CEO Joe Magnacca told analysts on an earnings call.

Indeed, RadioShack continues to burn through capital as it revamps its stores, assortment and systems amid steep sales declines. Total liquidity, including cash, cash equivalents, and available credit, fell from $423.7 million in May to $182.5 million last month, while total debt, due between 2018 and 2019, rose to $658 million last quarter.

At that rate, the business may barely make it through the holiday season.

Magnacca said the company is in “advanced discussions” with a number of parties in pursuit of recapitalization, which published reports identified as investment bank UBS and hedge fund/shareholder Standard General.

Confirmation of the talks came as the troubled CE chain accepted the resignation of CFO John Feray and reported a $137.4 million net loss for its second fiscal quarter, ended Aug. 2, compared to a year-ago net loss of $52.2 million.

Net sales sank 22 percent during the period, to $673.8 million, and comps declined 20 percent due to lower store traffic and softness in its postpaid mobile business.

“We have been challenged by the persistent industrywide decline in consumer electronics and soft mobility market,” Magnacca said. “The postpaid mobility business drove the majority of the weak performance this quarter due to lackluster consumer interest in the current handset assortment, consumers waiting for an iconic handset launch this fall, and intense promotional activities by the wireless carriers.”

Specifically, mobile sales, which account for about half of RadioShack’s retail revenue, fell 30 percent to $310 million, while sales within the catchall “retail” category were down 10 percent, to $298 million, on weak demand for batteries, VoIP devices, cordless phones, portable music players and audio cables, although sales of Apple Lightning cables, wireless speakers and wellness products were strong.

Magnacca, who was recruited from Walgreens two years ago to revive the long-ailing chain, dispensed with the traditional question-and-answer session on the earnings call, due, he said, to the ongoing talks with backers. Instead, he ticked off myriad turnaround efforts, both new and ongoing, which include improving the wireless activation process and adding new mobile offerings, while lessening dependence on that business by refreshing the product assortment, continuing the store remodeling program, and providing new services like its Fix It Here in-store mobile repair program and a ship-from-store pilot.

He also cited improving sales trends, particularly within the retailer’s 84 interactive concept stores.

Magnacca noted that a potential recapitalization could require the consent of RadioShack’s lenders, who previously nixed a plan to close some 1,100 stores. The consolidation, which would have affected a quarter of the store base, is needed to slash the chain’s cost structure and staunch its losses, the company contends; but in a classic Catch-22, the creditors voted to retain the assets in order to recoup their losses in the event of a bankruptcy.

Magnacca said he is continuing to work with current lenders, bondholders, shareholders and landlords to overhaul the balance sheet and create a long-term solution. But to garner their support, argued Janney Capital Markets analyst David Strasser, “The company needs to show stabilization at a time that product cycles are going against it and the economy continues to challenge its core customer.”

Strasser also questioned RadioShack’s ability to obtain holiday inventory from skittish vendors, particularly in-demand products like iPhone 6.

In the meantime, the clock continues ticking for the iconic, 93-year-old chain, which famously mocked its irrelevancy last February in a Super Bowl commercial featuring outdated devices and fading stars.