What’s Next for RadioShackCurrent Status and Path Forward

September 22, 2014

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Overview

• RadioShack, an electronics retailer with approximately 4,300 U.S. locations as of 2013, is struggling.

– The company recently announced its tenth consecutive quarterly loss

– Management’s plan to close 1,100 underperforming stores was rejected by lenders earlier this year

– As a result of its falling stock price, the company faces delisting from the NYSE stock exchange

– Chief Financial Officer John Feray recently announced his departure, after only seven months on the job. He will be replaced by interim CFO Holly Etlin of AlixPartners.

– The company is currently working with investment bank UBS and hedge fund Standard Group to raise additional capital in order to avoid a liquidity crunch.

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Snapshot

Valuation Balance SheetShare Price 0.91$ Total Cash 30.5Enterprise Value 719.1 Total Debt 658.0

Income Statement ProfitabilityRevenue (ttm) 3,430.0 Gross Margin (ttm) 34.1%EBITDA (ttm) (226.2) EBITDA Margin -6.6%

Amounts in millions

Recent years have seen a worsening in trends around profitability, company-wide and same-store sales.

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A Faltering Concept

30.0%

32.5%

35.0%

37.5%

40.0%

42.5%

45.0%

47.5%

$-

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$4,000.0

$5,000.0

2009 2010 2011 2012 2013

Gro

ss M

arg

in (

%)

Net

Sal

es (

$ m

illio

ns)

Sales & Gross Margin

In the past ten years, shareholders of RadioShack have endured adjusted share price losses of nearly 96%.

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Share Price

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$5.00

$10.00

$15.00

$20.00

$25.00

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$35.00

Stock Performance

Zone of Insolvency

• When a company enters what is known as the “zone of insolvency”, the fiduciary duty that officers and directors of that company would normally owe to shareholders switches and is instead owed to creditors.

• A company is considered to be insolvent when one or both of the following is true:

– The company’s liabilities exceed the value of its assets– The company is unable to pay debts as they come due

• RadioShack can rightly be said to be insolvent, as the first factor is demonstrably true, and the second seems likely.

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• Since the 2005 bankruptcy code change, large retailers have been unsuccessful in utilizing bankruptcy to reorganize.

• Several retailers have initially entered bankruptcy seeking to reorganize (i.e. chapter 11 filings), only to later convert to a chapter 7 (i.e. liquidation).

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Bankruptcy: A Retail Graveyard

Company Name Store Count Filing DateLinen 'n Things 571 May-08Circuit City 567 Nov-08Borders Group 686 Feb-11

Restructuring - Bankruptcy

• Financing– Additional financing will be necessary, as RadioShack’s liquidity situation is

already worrisome – It is possible that existing lenders can be induced to provide additional capital as

a purely defensive measure

• Locations– A bankruptcy filing would necessitate a rapid analysis of the profitability of each

of RadioShack’s nearly 4,300 U.S. locations– This “four wall analysis” will be the basis for the decision on which stores to

close, and which leases to accept or reject

• Endgame– Given the financial performance of the company, a bankruptcy filing would likely

result in the company’s sale to a distressed investment firm – Such an investor would seek to engineer a turnaround after funding an exit from

bankruptcy

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Restructuring – Out of Court

• Financing– Additional financing is necessary– Absent the additional protections afforded a lender in the context of bankruptcy,

terms for new capital will be onerous

• Locations– Due to the need to avoid accelerating lease obligations or violating lending

covenants, underperforming locations would be eliminated more gradually

• Endgame– Absent the protections afforded to a buyer in the context of a bankruptcy, the

best hope for the company might be an infusion of growth capital that would allow for management to stabilize operations, with a goal of selling to a strategic buyer at a later date

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Questions to be Answered

• RadioShack must answer the difficult question of why it deserves to exist, and it must do so in such a way as to not further worry key stakeholders (lenders, suppliers, landlords, employees, etc.).

• The future of the company is not dependent on whether or not it files for bankruptcy, but on the strategy that the company decides on and the soundness of the tactics that it chooses to employ.

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• David Johnson is a founding partner of ACM Partners. His advisory experience spans North America and ranges from pre-revenue startups to Fortune 500 companies.

 

• An active member of the Chicago business community, David currently serves on the board of directors of both Gateway Foundation and ChildServ, two storied nonprofit organizations focused on behavioral healthcare and family services, respectively. Additionally, he is an active member in several professional associations.

 

• David’s writing has appeared in several industry publications, and he has lectured at the University of Chicago, Northwestern University, the University of Wisconsin-Madison, the University of Illinois-Chicago and Loyola University Chicago.

 

• David earned his MBA from the University of Chicago.  His undergraduate studies were completed at Fairleigh Dickinson University.

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David Johnson

• ACM Partners is a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services.

• David Johnson can be contacted at:– Email: david@acm-partners.com

– Ph: 312-505-7238

– Twitter: @TurnaroundDavid

• For more information visit: www.acm-partners.com.

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About ACM Partners