john@johnducas.com

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RSH: The First to Fall?

RadioShack Corp (NYSE:RSH) has long been a household name for many Americans for decades. They were on top of the electronics retail game from the late 70’s all the way to the mid 2000’s as one of the sources of the hottest gadgets despite heavy competition from rivals like Best Buy Co. (NYSE:BBY). But in the recent year dating back to 2010 investors and consumers alike have caught on to the ever growing dominance of e-commerce with Amazon (NYSE:AMZN) turning out almost $80 billion in revenue in 2013 which is more then Best Buy and RadioShack combined and huge IPO’s like China’s e-commerce powerhouse Alibaba (NYSE:BABA) surfacing on our shores. It’s only logical to see investors shy away from brick-and-mortar consumer electronic retailers. But what’s troubling about RadioShack specifically is the amount of stores the have across the United States and their weak e-commerce strategy, RadioShack is placed in a significantly more vulnerable position then their generally healthy cousin Best Buy. Here’s a chart of $RSH’s price vs short interest in the stock.We see as the selloff begins short sellers begin to stock up. The chart shows that from $22.50-$12.50 is where most Shorts made their money whereas a few held on.

 

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Financials:

 

RSH 2011 2012 2013
Net Income $67.1M -$139.4M -$392M
EBITDA $274.2M $44.1M -$233.9M

 

 

These figures are an example of how RadioShack has taken such a big hit over the past few years. I interpret this information as solid evidence that RadioShack is headed for an accelerated death.

 

Cash Infusion & Future Outlook:

 

 

In the recent months Standard General along with a number of other investors organized an agreement with RadioShack to refinance around $590 Million worth of loans. This would result in a net investment in RadioShack. Seems great right, a huge investment that restores faith in investors and ultimately sets up the lagging retailer for a great holiday season…well kind of. The investment that was made can be converted into a 50% equity stake in the company and can only be done after a Rights Offering has been given to common shareholders at $0.40. In Simple terms a rights offering is where shareholders get to invest in the said company for a discount price with the proceeds going to the company. As RadioShack continues to fall and once the terms of the convertible investment has be met, the shareholders will become diluted leaving Standard General and other with senior priority over RadioShack’s assets.

 

This scenario will determine two possible outcomes for Standard General. They can ether take the approach of actually turning around the sinking company, or they can liquidate first and cash out. This is a win/win for Standard General. And judging by sales and revenue for the past years, putting faith in a good holiday season to turnaround RadioShack is quite inflated.

 

Conclusion

 

With the desperate cash infusion looking to hype investors will be a very short-lived event and when the research is done, it’s quite a weak catalyst. I see RadioShack hitting their $0.40 level following the holiday season. As of Nov 21 $RSH is trading below $1 and will be very volatile to any negative or positive news regarding it and its sector especially approaching the holiday season. As something to note, $RSH has a Market Cap of <$100M and can move great amounts in a short period of time.

 

by Gabe Clenndening