RadioShack’s Turnaround Plan Why the Lenders said “No”

July 30, 2014

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Overview

• On March 4, 2014, the management team of RadioShack (RSH) announced its intention to close up to 1,100 underperforming stores as part of a comprehensive turnaround plan.

• The company has seen declining financial performance for several years, and the plan was notable mainly for its scale, and the what that implied for the health of core operations.

• On May 8, 2014, RadioShack announced that it had been unable to solicit lender support for its store closure plan under terms acceptable to management.

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Recent years have seen a worsening in trends around profitability, company-wide and same-store sales.

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A Faltering Concept

30.0%

32.5%

35.0%

37.5%

40.0%

42.5%

45.0%

47.5%

$-

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

2009 2010 2011 2012 2013

Gro

ss M

argi

n (%

)

Net

Sal

es ($

mill

ions

)

Sales & Gross Margin

2012 and 2013 saw considerable management attempts to rationalize the U.S. store count, while also pulling back on capital expenditures (potentially a contributing factor in the 8.8% decline in same store sales for 2013).

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Tentative Steps

4,200

4,250

4,300

4,350

4,400

4,450

4,500

4,550

2009 2010 2011 2012 2013

U.S. Store Count

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

11.0

11.2

11.4

11.6

11.8

12.0

2009 2010 2011 2012 2013

Cape

x / s

q ft

($)

Tota

l Sq

Ft (#

mill

ions

)

Retail Footprint

Implicit Assumptions

• The RadioShack management team appears to have made a number of implicit assumptions in crafting their turnaround plan.

• It is likely that these assumptions raised serious concerns among the company’s lenders.

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• RadioShack management is in danger of trying to catch a falling knife

• If reducing the U.S. store count by over 25% is insufficient, it is unclear if the business has a viable core

Implicit Assumptions Cont. 1) Store closures would halt the decline in same store

sales

-10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

2009

2010

2011

2012

2013

Same Store Sales

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• RadioShack will effectively be creating an $800 million division of underperforming stores

• Closing stores is a specialty skillset

Implicit Assumptions Cont. 2) Management is capable of overseeing the orderly wind-

down of 1,100 stores on an expedited timeframe

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• Inventory at underperforming stores would be in the neighborhood of $150 million

• Annual rent expense per U.S. store ~ $49,000 (settlement costs ~ $54 million assuming 12 months of rent per store)

Implicit Assumptions Cont. 3) The closure of underperforming stores can be managed

so as to be cash flow neutral

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• The turnaround plan would result in a company generating less than half as many gross profit dollars as in 2010

• SG&A, over $1.4 billion in the most recent year-ended, would need to decline by 36% for the company to be EBITDA break-even

Implicit Assumptions Cont. 4) Management would be able to reduce SG&A by at least

$500 million Period 2014 PF 2013 2012 2011 2010 2009

Net Sales 2,642.0 3,434.3 3,831.3 4,032.1 4,201.1 4,065.8

Cost of Goods Sold 1,740.2 2,262.1 2,360.1 2,310.4 2,310.6 2,195.5

Gross Profit 901.8 1,172.2 1,471.2 1,721.7 1,890.5 1,870.3 Gross Margin % 34.1% 34.1% 38.4% 42.7% 45.0% 46.0%

Selling, general and administrative expense 901.8 1,407.4 1,421.4 1,475.7 1,457.8 1,431.2 SG&A as a percentage of sales 34.1% 41.0% 37.1% 36.6% 34.7% 35.2%

EBITDA - (235.2) 49.8 246.0 432.7 439.1

Pro

• Considerable reduction in U.S. store count offers the potential to clear out “dead wood” in retail footprint and focus on viable store locations

• Announcing plan at a time when RSH has undrawn borrowing capacity shows foresight

• At a high level the plan appears to fund itself (i.e. cash generated from liquidating store-level inventory should pay for lease settlement costs)

Con

• It is unclear if the reduction in U.S. store count would be sufficient

• Plan announced shortly after close of a new revolving facility; the timing likely proved challenging to lenders

• Plan does not appear to address serious interim liquidity pressures implied

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Turnaround Plan – Pros & Cons

Conclusion

• On March 4, 2014, the management team of RadioShack put forward an aggressive turnaround plan, focused on a significant reduction in U.S. store count.

• Management’s announcement, only two months later, that it was unable to garner lender support for its turnaround plan highlights a failure to anticipate the concerns of key stakeholders.

• In order for RadioShack management to engineer a successful turnaround it will be necessary to improve communication with all stakeholders and more clearly lay out a viable path to success.

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• David Johnson is a founding partner of ACM Partners. His advisory experience spans North America and ranges from pre-revenue startups to Fortune 500 companies.

• An active member of the Chicago business community, David currently serves on the board of directors of both Gateway Foundation and ChildServ, two storied nonprofit organizations focused on behavioral healthcare and family services, respectively. Additionally, he is an active member in several professional associations.

• David’s writing has appeared in several industry publications, and he has lectured at the University of Chicago, Northwestern University, the University of Wisconsin-Madison, the University of Illinois-Chicago and Loyola University Chicago.

• David earned his MBA from the University of Chicago. His undergraduate studies were completed at Fairleigh Dickinson University. David can be reached at david@acm-partners.com or 312-505-7238.

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David Johnson

• ACM Partners is a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services.

• David Johnson can be contacted at: – Email: david@acm-partners.com – Ph: 312-505-7238

• For more information visit: www.acm-partners.com

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