RadioShack’s Last Day Could Be Its First

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As I stated in my last post, I sold my entire stake in RadioShack a couple weeks back. But that doesn’t mean I’m ignoring the company. The recent deal with Standard General and Litespeed Management has me pretty intrigued.

I know that RadioShack has inked refinancing deals before, but this one is a bit different. If certain contingencies are met, this deal will give Standard General and Litespeed Management a majority stake in the company, allowing them the revamp the entire board of directors. Hopefully with a new board comes new ideas, new directions, and new life. As always, only time will tell, though. RadioShack still needs to make it through the holiday season with over $100 million in liquidity (along with a renegotiated supplier contract and a viable year-long business plan) before any of this can come to fruition.

Additionally, the deal requires RadioShack to issue 300,000,000 shares to the public with a $0.40 price tag. I’m hoping to see RadioShack reach a new group of investors with this offering. Because in order to attract a new crop of investors, RadioShack will need an absolutely rock-solid plan for the future. If Standard General ends-up buying all of these public shares, it will signify (to me) that RadioShack’s plan just isn’t good enough.

With so many new common shares potentially hitting the market, RadioShack is virtually starting an entirely new company (from a public-equity perspective). If Joe Magnacca’s turnaround plan slows their cash-burn enough for a revamped board of directors to come aboard, the company’s potential is enormous. It could really be day one for RadioShack. With new people and new ideas, a new RadioShack has the potential to innovate on a grand scale. How often is a ‘new’ company able to reach over 3,000 retail locations worldwide on their first day?

I’m eager to see how these next few months play out. In the mean time, I imagine this stock will become a nice toy for day and swing traders.

RadioShack Investment Crossroads

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As mentioned in my last RadioShack-related post, I’ve been re-evaluating my position ever since they first announced the refinancing deal last month. And, with 70% of my thesis proven correct, I’ve decided to sell my position for now. Given RadioShack’s current situation, the remaining 30% of my thesis doesn’t offer enough upside at this point in time. Here’s why:

We all know that RadioShack is burning through cash at an expedited pace. Nobody knew exactly how fast, though, until they released their Q2 earnings report a couple weeks ago. In Q2, their cash-on-hand decreased from $61 million to $30.5 million and their credit-line decreased from $362 million to $152 million. If you do the math, you’ll see that they burned through $240.5 million in one quarter, leaving them with only $182.5 million for Q3. That means that Q3 would have to be about 25% better than Q2 in order for the company to stay solvent. With Q2’s burn-rate, though, they’d be lucky to survive through the end of Q3 in September.

To survive solely off of Standard General’s refinancing deal, RadioShack needed to act fast in Q3, finishing the deal and closing 1,100 stores. Fast-forward to September 22, eight days before the end of Q3. RadioShack sends out an SEC filing stating that “The Company and certain of its largest creditors have had discussions with a major vendor concerning potential modifications to the commercial relationship that could be beneficial to a financial restructuring of the Company. These discussions did not result in a change to the commercial relationship at this time but are continuing.”

Emphasizing what I said earlier, RadioShack needed to act fast. If they were acting fast, RadioShack would’ve put out a press release stating that they signed the refinancing deal long ago and already began closing under-performing stores. Instead, they send out an SEC filing announcing that they’re still playing around with other options.

At this point in time, refinancing is no longer enough. Refinancing only gives them the ability to cut costs through store closures, but it doesn’t give them any new cash. And they absolutely need cash NOW. With their low credit rating, RadioShack won’t be able to open-up new lines-of-credit without offering something huge in return. All they can offer at this point, though, is equity. And in their desperation for cash, they’re likely going to have to give up a tremendous amount of equity to get that cash.

So just how much equity would they have to give-up at this point? Well, according to their most recent 10-Q financial statement, they’re currently authorized to issue up to 650,000,000 common shares. As of right now, they’re sitting at around 146,000,000 shares on the open market, so that gives them the ability to issue north of 504,000,000 additional shares without asking current shareholders for approval. And then there’s also 1,000,000 preferred shares and 300,000 Series A shares available to issue.

To make a long story short, RadioShack only has two options now: mega-dilution or bankruptcy. With those being the only two viable options (both of which decrease shareholder value), maintaining my RadioShack investment provides no benefits at this time. So I plan to wait on the sidelines for either bankruptcy or an SPO. An SPO would likely provide the open market with largely discounted shares, making the risk-reward potential dramatically better for the thrill-seeking investor. And being that kind of investor, I wouldn’t hesitate buying back in at an SPO price. Because with RadioShack Labs, Fix It Here, and Defense Mobile rolling out, there’s a lot of potential upside if RadioShack has the time to implement Joe Magnacca’s turnaround plan.

A Visit to RadioShack’s Boston Concept Store

With 70% of my RadioShack thesis playing out sooner than I expected, it’s already time to seriously re-evaluate my position. So I thought that visiting one of the new concept stores would be a great place to start. Luckily, there’s one that opened-up in downtown Boston a few months ago.

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Sandwiched between a bank and a bakery along the Freedom Trail, the Boston concept store has a considerable amount of foot traffic passing by everyday. Sounds like a prefect location! Unfortunately, due to the the historic status of the area, RadioShack isn’t allowed to do much with the outside of the building. This results in smaller than desired windows and a decreased visual allure. The store doesn’t have much of a chance to actively entice curious pedestrians who weren’t already planning on stopping by. The best this location can do is leave the door open and hope that the music draws people inside. Once you step inside, though, it’s an entirely different experience. (more…)

Why I’m Investing in RadioShack

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I spent two weeks trying to talk myself out of investing in RadioShack, and another week asking my wife and friends to talk me out of it. I was finding way too much value in a company that everybody else had left for dead. Surely I had to be missing something. But alas, I am now a proud owner of RadioShack stock. I have four reasons for this, and here they are:

1. RadioShack Labs

How can a brick-and-mortar shop compete with and online retailer like Amazon? It’s impossible, unless they offer something Amazon doesn’t have. That’s the value behind RadioShack Labs. RadioShack is looking to bring you innovative products that can’t be found anywhere else.

RadioShack is simplifying the process for start-up companies to get worldwide, in-store exposure. RadioShack Labs offers fledgling start-ups the chance at an unreal amount of instant market penetration. I can see those companies battling for space in RadioShack, all-the-while providing the everyday consumer with unique products that can’t be found online or in any other store. And it just takes one smash-hit product exclusively available at RadioShack to bring people pouring through the doors of their nearby, conveniently-located shop (there are over 7,000 locations worldwide, so you’re bound to find one without much trouble).

How can RadioShack benefit before that first smash-hit product, though? Through clever marketing and partnerships. Imagine watching an episode of Shark Tank on ABC. The Sharks are deliberating. They can’t decide if it’s worth investing in a new gadget. A live poll pops-up on the screen asking the viewer if he or she thinks the Sharks should invest in the product. That poll is sponsored by RadioShack Labs. 85% of the people believe the Sharks should invest in the product, but none of the Sharks actually pull the trigger. Immediately after the show airs, RadioShack Labs blogs that the popular gadget will appear in their shops next week, righting the Sharks’ wrong. People are now stopping by a RadioShack every week to see if their favorite Shark Tank products are in-store.

2. An Expanded Fix It Here Program

Just look around and see how many people have cracked cell phone screens. Enough said.

3. Joe Magnacca and Friends

Joe Magnacca has already proven that he can revive a dwindling brand in Duane Reade. He was recently brought-on as a board member at American Apparel to help revive the struggling clothing company. The man’s trusted to find value if any value is actually there.

And Magnacca’s list of investor-friends has likely grown quite a bit through his involvement with American Apparel. Big-name investors have been rolling-in to help fund their recovery, and those same investors may find value (both monetary and nostalgic) in RadioShack as well.

4. Possible Renegotiation of Debt Contracts

The last and most important thesis point. RadioShack’s debt-holders refuse to let the company close more than 200 stores per year. If this holds true for much longer, I believe that RadioShack will go bankrupt. The stock market agrees with me and has priced RadioShack stock accordingly. However, the market is treating this wildcard as a fact, giving the company a market capitalization of around $60 million. Any scenario is technically possible, though, and therefore nothing should be set in stone this early. Debt is often renegotiated, and I theorize that some sort of renegotiation will likely occur.

RadioShack has a few hundred million dollars in assets (after taking into account their debt load). If the debt contracts are renegotiated (and RadioShack is allowed to close 1,100 stores), their market capitalization should quickly re-adjust to a more realistic value above $100 million.

 

RadioShack Thesis Breakdown

This is where I weigh each thesis point against each other. I base each thesis point’s value on a combination of three things: it’s comparative market impact (in my opinion), it’s likelihood of occurring (also, in my opinion), and it’s overall importance to my thesis. Like always, nothing is set in stone and I will re-evaluate my thesis every step of the way, as the situation evolves.

Radio Shack Thesis Chart