Why Radio Shack Stock Was in the Dumps

Why Radio Shack Stock Was in the Dumps

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Radio Shack took an afternoon dive today, falling as much as 23% after trade publication Debtwire revealed that the company is on the verge of a liquidity crisis.

So what: According to the report, the struggling retailer is considering hiring a financial advisor to help shore up its balance sheet, as the company is facing problems with debt maturities, negative cash flow, and excessive inventory. Radio Shack did, however, issue a statement to CNBC later in the day, saying its balance sheet was strong, with $820 million in liquidity; but, like other companies, it found reason to entertain outside advice on strengthening its balance sheet. Shares bounced back to finish down just 7% at the end of the day, and gained a bit more after hours.

Now what: Despite management's statement and the stock's recovery, it's not surprising why investors would react so strongly to such a report. Radio Shack is fighting an uphill battle against retail giants like Target, Wal-Mart, and Amazon.com, and has had five straight quarters of negative net income. Free cash flow, meanwhile, has run negative free three of the last four quarters. With results like that, it's only time before a liquidity crunch arrives. Radio Shack may not be on its deathbed just yet, but it's hard to see a reason to bet on this company for the long term.

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The article Why Radio Shack Stock Was in the Dumps originally appeared on Fool.com.

Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and RadioShack. 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.

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Originally published