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Lenders Give RadioShack Static Over Store Closures

Fewer Stores Will Be Closed, but Retailer Faces Future Risks
May 21, 2014
RadioShack Corp. has hit an impasse with its lenders over the electronic retailer's do-or-die plan to terminate or renegotiate leases and shutter up to 20% of its stores as part of its restructuring plan after racking up losses totaling more than $400 million last year.

Lenders to the troubled retailers withheld their consent to the retailer's plans announced last March to shutter as many as 1,100 RadioShack locations.

Fort Worth, TX-based RadioShack had engaged Melville, NY-based real estate advisory and investment group A&G Realty Partners to oversee the store closings program.

The closing of up to 1,100 stores is more than double the 500 planned closings planned in early February.

While the company said it may continue to hold discussions with its lenders regarding the proposed store closure program, it now plans to close fewer stores and pursue other cost reduction measures permitted under existing loan terms. Such plans could include inventory rationalization, a greater emphasis on the company’s signature sales platform and increased online sales.

As of year-end 2013, RadioShack maintained 5,519 retail locations in shopping centers, malls and stand-alone buildings, including 4,297 company operated U.S. stores, 948 dealer-operated locations and 274 company owned stores in Mexico, according to company financial documents.

Since the store closures would shrink the company’s asset base, senior secured lenders sought to protect their interests by demanding certain concessions from the retailer that may have included increased pricing, additional fees or collateral in exchange for approving the store closure plan.

According to RadioShack's loan terms, if the number of domestic stores decreased below 4,278, the company was required to set aside additional reserves.

According to Fitch Ratings, this development is credit negative for RadioShack’s unsecured bond investors who might have benefited from a turnaround strategy premised on closing underperforming stores and improving the performance of remaining stores.

Streamlining the store count was a big part of management’s strategy to reduce cash burn, which resulted in the company’s cash balance declining to $180 million at year-end 2013 from $536 million a year earlier, Fitch analysts said.

But even store-closure gains would have come with caveats; the 1,100 planned store closures would have reduced RadioShack’s revenue base and the liquidation of inventory in these stores would have only partially offset the costs associated with lease terminations tied to the closures.

Unless RadioShack can orchestrate a successful turnaround strategy over the next 12 months and improve customer traffic in its stores, Fitch analysts believe the company’s liquidity will continue to deteriorate and it will start to lose vendor support, Fitch analysts said in downgrading RadioShack’s long-term issuer default rating (IDR) to ‘CC’ from ‘CCC.’

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