News Column

RadioShack's shares slide on big first-quarter loss

June 10, 2014

By Barry Shlachter and Steve Kaskovich, Fort Worth Star-Telegram

June 10--FORT WORTH -- Shares of RadioShack Corp. dropped 10 percent Tuesday and analysts warned that turnaround efforts may be running out of time after the retailer reported another big loss in the first quarter as sales declined sharply.

Results were hit hardest by poor cellphone sales because of deals offered exclusively by the big carriers themselves, executives said.

The Fort Worth-based consumer electronics retailer said its loss from continuing operations was $98.3 million for the 13 weeks that ended May 3, far wider than $23.3 million a year ago and much worse than analysts predicted. Net sales declined by 13.2 percent to $736.7 million and comparable-store sales, at locations open at least a year, fell 14 percent.

RadioShack shares (ticker: RSH) closed down 16 cents to $1.38 a share.

Chief Executive Officer Joseph Magnacca, who has tried to revive the chain since taking the helm early last year, said the disappointing results were affected by "an industrywide decline in consumer electronics and a soft mobility market" weakened by "lackluster consumer demand" for new cellphones.

The company has also been stymied by its inability to gain lender support for a plan to close up to 1,100 of its 4,300 company-owned stores this year. The company now plans to close just 200 stores a year over 36 months, its limit under the loan covenants.

In a conference call with analysts, Chief Financial Officer John Feray declined several times to explain the reasons for the impasse with lenders, saying only that the sides could not reach mutually agreeable terms for the closures. He stressed that talks have continued and that the lenders remain "very supportive" of RadioShack's turnaround strategy, dismissing reports of tension with lenders as "chatter."

"We have very solid relationships with our lenders, regardless of what is written in the press," Feray insisted.

Last week, Magnacca was more expansive, telling the Star-Telegram before the company's shareholders meeting that the dispute with lenders stemmed from their desire to take a "premium," or more than the value derived from the planned closing of 1,100 stores.

Despite the challenges, the CEO told analysts that he sees signs of progress at RadioShack, noting key new hires and a pipeline of new products "that will drive differentiation and newness." Unproductive inventory will be "refreshed" by other products that will replace 30 to 40 percent of the current selection. Among them will be private-brand products, which will be on shelves by the fall.

"I believe that progress in this area of our business will drive the most meaningful improvement in our performance this year," Magnacca said. "It affects all of our stores and is intended to drive sales across our network."

But not all the analysts were convinced.

"The results were worse than people thought," Will Frohnhoefer, an analyst for BTIG, told Bloomberg News. "It speaks to a flawed strategy."

RadioShack plans to remodel 100 stores that will adapt designs from a string of concept stores rolled out last year, which have shown "strong sales growth."

Magnacca said RadioShack is also looking to reduce expenses and has "taken steps to lower our corporate head count, leverage technology, and reduce discretionary expenses."

Later, company spokeswoman Merianne Roth clarified that no layoffs have been announced at the corporate headquarters but added: "We continue to evaluate our total head count and make adjustments as necessary. We have made some departmental realignments and eliminated some open head count where we were able to be more efficient."

Analyst David Strasser of Janney Montgomery Scott wondered how much all the changes will contribute.

"While the company continues to make strides with its new concept stores, which are seeing sales growth as the stores look great, they make up such a small part of the overall store base that they do not really move the needle," Strasser cautioned in a research note.

"Additionally, remodeling to this new concept takes both time and money, two assets in short supply," he said. "Our key issue is that we do not see a scenario near to midterm where the company can drive a gross profit in excess of [selling, general and administrative expenses] dollars."

Even more bluntly, according to a Wall Street Journal blog, BB&T analyst Anthony Chukumba said in a note to clients: "RadioShack's much worse-than-expected [quarterly] results demonstrate that senior management's turnaround efforts do not appear to be bearing much fruit, in our opinion, and we increasingly believe time could be running out for the company."

Magnacca said during the call that a new in-house repair service, Fix It Here, has gotten a favorable reception. The program has been rolled out at 280 stores and will eventually be offered at 700.

The CEO said that technically inclined workers received 40 hours of training -- which minimized cost -- to replace screens, change batteries and make other repairs on cellphones and tablets. New staff would be added only if needed, he said.

Last week, the company unveiled a partnership with PCH International, a development company that works with startups to bring new technology products to market. Under the deal, PCH clients will deliver unique products to RadioShack stores starting this year.

The company said it ended the quarter with total liquidity of $423.7 million, including $61.8 million in cash and cash equivalents.

RadioShack got more bad news at last week's meeting when shareholders rejected a nonbinding resolution on compensation for top executives. According to a Securities and Exchange Commission filing made Monday, holders of 21 million shares voted against the pay packages, with 17 million in favor.


Barry Shlachter, 817-390-7718 Twitter: @bshlachter Steve Kaskovich, 817-390-7773 Twitter: @stevekasko


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Source: Fort Worth Star-Telegram (TX)

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