Stringent Loan Covenants, Need to Break or Renegotiate Leases Add Obstacles to Retailer's Turnaround Challenges
RadioShack Corp. announced it will terminate or renegotiate leases and shutter up to 20% of its stores in what some analysts view as a last-ditch effort to halt losses totaling more than $400 million last year.
Fort Worth, TX-based RadioShack has engaged Melville, NY-based real estate advisory and investment group A&G Realty Partners to oversee the store closings program, which is still subject to approval by the retailer's lenders.
The closing of up to 1,100 stores is more than double the 500 planned closings reported by The Wall Street Journal
in early February. As of Dec. 31, 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.
"In coming weeks, we'll be working with our landlords to find an efficient and cost-effective means to exit these unprofitable locations," John Feray, chief financial officer, told investors Tuesday.
The chain has tried for years to revamp and modernize its stores and company image, including a 2009 campaign to rebrand as "The Shack," and most recently, a humorous ad during the most recent Super Bowl.
In the ad, a stunned Radio Shack employee announces after hanging up from a call, "The '80s called. They want their store back," as a host of characters dressed as '80s pop culture icons strip the crowded store shelves of their inventory, leaving an empty shell.
The liquidation of such inventory along with the store shuttering are now the central strategy in preserving Radio Shack's liquidity through the rest of 2014. The cash raised and savings are expected to partially offset potenntially expensive lease termination payments to landlords and store liquidation costs.
California has the largest number of Radio Shack stores, 565, followed by Texas (408), New York (342), Florida (309) and Pennsylvania (242). RadioShack did not disclose which underperforming locations might be closed, but said it would weigh demographics, lease duration, store performance and growth potential for the stores, which average 2,426 square feet in the U.S.
RadioShack decided not to renew leases and closed 378 corporate and dealer owned stores, and discontinued more than 3,000 kiosk locations, during 2012-13.
In February 2013, RadioShack hired former Walgreen Co. executive Joseph C. Magnacca to lead a turnaround. However, comparable same-store sales declined 8.8% for the year and 19% for the fourth quarter as the chain this week reported a net loss of $191.4 million for the quarter in the wake of a dismal holiday sales performance.
RadioShack's share fell 17.3% Tuesday to close at $2.25.
Magnacca said the company is still determining which leases it would ask to break or allow to expire, with the possibility that rent reductions negotiated with landlords could keep some stores in place. The plan also requires the approval of RadioShack's lenders. The current credit agreement only allows the chain to close up to 200 stores per year and up to 600 stores over the life of the agreement.
"We will continue to have a strong, unmatched presence across the U.S. with over 4,000 stores including over 900 dealer franchise locations," Magnacca said. "Without minimizing the challenges ahead, we have a detailed strategic path to profitability based upon the five pillars of our turnaround."