It's been clear for a long time that RadioShack is in big trouble. RadioShack stock, which was above $20 as recently as 2010, has spent the last 2 years in low single-digit territory.
RadioShack Stock 5 Year Price Chart, data by YCharts
RadioShack's last hope for a turnaround was an aggressive cost-cutting plan, announced in March, that called for closing more than 1,000 stores this year. However, the company's lenders scuttled that plan just 2 months later. After that setback, bankruptcy looked like RadioShack's best option .
After 4 more months of dreadful results, RadioShack's management team is nearing the same conclusion. The only people still in the dark are RadioShack shareholders and day traders looking to flip the stock for a quick profit. Don't get sucked into this madness -- RadioShack stock is almost certainly worthless.
Liquidity problems intensify
As of early May, RadioShack appeared to be spiraling toward bankruptcy. Its cash on hand had declined by nearly two-thirds since the beginning of 2014 (from $180 million to $62 million). However, RadioShack shareholders could at least take comfort in the $362 million available on the company's credit line.
By the beginning of last month, RadioShack was down to just over $30 million of cash, with only $152 million available through its credit line. In other words, total liquidity dropped by more than 50% in the span of 3 months.
The biggest culprit: plummeting sales. RadioShack reported that comparable store sales plunged 20% in Q2, and its adjusted loss widened from $62.9 million to $101.5 million. RadioShack's money-losing store operations are rapidly draining its liquidity reserves.
RadioShack Stock 1 Week Price Chart, data by YCharts
RadioShack shares did fall on Friday, but that still left the stock up more than 50% compared to its mid-August level. RadioShack stock's wild gyrations during the past few weeks have attracted hoards of day-traders looking to flip the stock for a quick profit.
However, this is a fool's game. (Not to be confused with a Fool's game: here at the Fool we believe in investing for the long-term -- not day trading.)
Some companies like American Airlines have been able to compensate shareholders well, despite going through bankruptcy. RadioShack isn't likely to be one of those companies. Whereas American Airlines benefited from an industrywide revival, physical consumer electronics retail stores won't be making a comeback.
While RadioShack CEO Joe Magnacca recently talked about "improving trends" in the core retail segment, all he meant was that the rate of sales declines has slowed -- but revenue is still falling! Moreover, RadioShack would need to boost comparable store sales by 30%-40% from current levels to get back to breakeven. Modest operating improvements won't create any value.
In a worst-case scenario, RadioShack will have to liquidate. In a best-case scenario, it will develop a workable plan to stay in business. Even then, its unsecured creditors -- including the holders of its $325 million loan, suppliers, and landlords -- will get compensated with new RadioShack stock, and current shareholders will get nothing.
Stay away
The only thing investors really need to know about RadioShack stock is that they should stay far away. RadioShack is rapidly burning cash, liquidity is already at a dangerously low level, and the company needs massive comparable store sales growth to get back to breakeven.
There is a good chance that the RadioShack story ends with a total liquidation of the company within the next year or so. But even if RadioShack manages to stave off that disastrous ending, it is still almost certain to declare bankruptcy in order to get out of unprofitable store leases and clean up its balance sheet.
Either way, owners of RadioShack stock are likely to get nothing, give or take a few pennies. Any upside from a potential turnaround or fire sale will benefit unsecured creditors, not RadioShack shareholders.
The article Don't Touch RadioShack Stock: It's Probably Worthless originally appeared on Fool.com.
Adam Levine-Weinberg is long January 2016 $80 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
