Rating agency Standard and Poor's (S&P) downgraded the
credit rating of the struggling U.S. consumer electronics and
) to CCC+ from B- along with a negative outlook. S&P expects
RadioShack to continue with its poor financial performances as
the company remains surrounded with fierce competition from its
Best Buy Co.
) and stores operated by other wireless carriers.
RadioShack's rating was downgraded on the back of the
company's vulnerability to non payment of its dues and its
dependence on favorable business and economic condition to meet
its financial obligations. Meanwhile, the negative rating outlook
conferred to RadioShack indicates that in case of any poor
financial performance by the company, there remain chances of
further reduction in outlook.
The primary cause of concern for the creditors of RadioShack
is that the recovery rating on the company's senior unsecured
debt is "4", which indicates that in case of a payment default,
there is only a 30-50% chance of recovering the money.
According to S&P, the rationale behind the rating
downgrade is that they expect the company's earnings to remain
under pressure in 2012 and 2013, mainly attributable to the
competitive nature of the consumer electronics business and the
high concentration of low margin mobility business, which
constitute more than 50% of RadioShack's revenue.
However, the only upside for the company is its liquidity
position as it has adequate cash to meet its need over the next
12 months. RadioShack has achieved its target of securing $175
million worth of new financing at a blended interest rate of
approximately 9%, which will be used to refinance half of its
convertible bonds worth $375 billion, due in August 2013.
However, the company's cash position could slide if it fails to
stabilize its falling margins.
The sluggish economic growth in the U.S. is hardly helping
RadioShack's prospects in any way. Weak consumer spending on the
back of limited disposable income along with a very competitive
industry dynamics remains the major road block for the company.
Accordingly, we do not foresee any meaningful changes in the
company's operating performances and thus remain skeptical about
the growth of the company.
We currently maintain a long-term Underperform recommendation
on RadioShack. However, it holds a Zacks #3 Rank, implying a
short-term Hold rating.
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