Fourth quarter looms largest for RadioShack

The stakes will be high for every retailer during the upcoming holiday season, but none more so than RadioShack where a stellar fourth quarter could help the company avert a gloomy scenario outlined by Moody’s Investors Service.

The rating agency suggested in a report released July 29 that RadioShack has adequate liquidity to see it through this year, but noted that 2015 could be a different matter.

“We think it is increasingly likely that RadioShack Corp. will run out of cash by the third fiscal quarter of 2015, before it can complete its turnaround plan,” according to the Moody’s report. To arrive at that conclusion, analysts constructed two scenarios, both of which assumed sales declines during the back half of the year. In the base case, Moody’s envisions RadioShack’s full year sales declining 7.4% with the company burning through $401 million of cash by February 1, 2015.

“Barring a cash infusion, RadioShack will not have much of a cash cushion to draw upon as it scrambles to remain relevant in the increasingly competitive mobile phone and consumer electronics business,” according to Moody’s. “Our optimistic scenario envisions the company having enough liquidity to get through 2015, although we see this as a less likely outcome.”

The optimistic scenario envisions a less severe sales decline of 4.6%.

On a positive note, Moody’s indicated RadioShack has no debt maturities until 2018 so that enhances the company’s liquidity runway to implement a turnaround strategy. However, Moody’s was quick to dismiss this positive aspect by noting that, “with each passing quarter and no credible evidence of a turnaround, the liquidity runway continues to shrink.”

While retailers are oftentimes forced into bankruptcy when suppliers stop shipping products, Moody’s doesn’t envision that scenario.

“From a working capital perspective, we have assumed some vendor tightening, but do not anticipate a loss of any major vendor support in the near-term given that RadioShack also has accounts receivable from a number of these large vendors,” Moody’s said. “We expect the company’s vendor relationships to shift from just transactional to more strategic going forward, as the company streamlines its inventory and partners with vendors that provide products and services, which would be aimed at jump-starting RadioShack’s revenue growth.”

The disparaging report from Moody’s caused shares of RadioShack to hit a new 52-week low of 68 cents on Tuesday and followed a warning last Friday that shares of RadioShack are in danger of being delisted from the New York Stock Exchange. Companies receive delisting notices when their shares trade below $1 for 30 consecutive days. A company can regain compliance with listing requirements if its stock trades above $1 for 30 days during the next six months.

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