RadioShack Corporation (NYSE:RSH)’s latest earnings report sent shares into a nosedive, and it’s easy to see why. Deutsche Bank analysts maintain their Hold rating and price target suspension on the retail chain because they do not believe that traditional metrics provide an accurate picture of the company’s financial situation.
RadioShack continues cutting costs
Along with its earnings report, RadioShack Corporation (NYSE:RSH) announced that it will try to close about 1,100 stores during the 2014 fiscal year. Most of those are expected to come in the second half of this year. In the near term, the cost savings are crucial for the company’s survival.
ValueWalk’s March 2021 Hedge Fund Update: Klarman, Loeb, Reddit And Much More
Welcome to our latest issue of issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Seth Klarman and Dan Loeb's investment in Intel, losses and profits from Reddit's frenzy, and an analysis of hedge fund pay. Q4 Read More
Analysts Mike Baker and Adam Sindler believe the retailer will be able to cut its costs by about $150 million in the second half of the year, which amounts to about $137,000 per store. They also believe these store closings will help RadioShack maintain good relationships with its key suppliers.
Investors question RadioShack’s liquidity
Although investors are focused on liquidity, the Deutsche Bank team believes the company will be able to keep going through at least the 2014 fiscal year, based on its current liquidity situation. RadioShack Corporation (NYSE:RSH) ended 2013 with $375 million available on its 2018 credit agreement. They estimate that the credit line will sustain the retailer for at least two more years, although they expect the company to dip into the reserves fairly soon. The analysts expect RadioShack Corporation (NYSE:RSH) to use about $100 million as early as the second fiscal quarter and then an additional $50 million in the fourth quarter.
However, they note that RadioShack Corporation (NYSE:RSH) could be able to reverse its sales and gross profit trends quickly. They estimate that the $121 million in positive free cash flow last year will turn slightly negative in the 2014 fiscal year and that cash burn will speed up to about $100 million in the 2015 fiscal year and beyond. The Deutsche Bank team estimates that this will mean RadioShack will have to draw down another $100 million in the fourth quarter of 2015. However, they have not included any benefits from closing stores. Management believes closing stores will result in early exit costs being exceeded by inventory liquidations.