Rating agency Standard and Poor’s (S&P) downgraded the credit rating of the struggling U.S. consumer electronics and service retailer RadioShack Corporation 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 rival Best Buy Co. (BBY - Analyst Report) 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.