RadioShack Still Has a Shot - a Long Shot
The chain filed for Chapter 11 -- bankruptcy reorganization -- and not the Chapter 7 designation that calls for a complete liquidation. It will now be up to the chain's creditors and the legal system to hash out what becomes of the chain.
The initial prognosis is pretty grim. The initial proposed plan is to sell between 1,500 and 2,400 of its roughly 4,000 domestic company-owned stores to Sprint (S) and RadioShack's largest hedge fund shareholder. It will then close the rest.
After seeing Borders, Circuit City and Blockbuster bow out of the market, it's easy to assume that this is the end for RadioShack. It might very well be, but it's not as if RadioShack is going to disappear right away. This isn't the end, even if it may be the beginning of the end.
Life After Chapter 11
RadioShack's brand will live on for now. The bankruptcy filing doesn't cover franchisee-owned locations, including the roughly 1,000 franchise dealer stores operating in Mexico and throughout Asia. They will stick around. It's also worth noting that the company-owned stores that will not close will continue to fly the RadioShack banner. Sprint's role is to create a "store within a store" concept in most of the surviving stores, where it will take up just a third of the retail space to service its Sprint and Virgin Mobile brands. The balance will be devoted to conventional RadioShack offerings.
This may not even be the way it plays out. Going the bankruptcy reorganization route to trim its debt requires court approval for the asset sale, and that includes opening up the bidding floor for other parties that may want to submit offers for RadioShack's assets.
This doesn't mean that shareholders and shoppers can wait it out. The stock may be trading for pennies these days, but a bankruptcy makeover may wipe them out completely with full ownership going to the creditors.
Consumers also probably don't want to snooze through the process. The stores that are closing just kicked off their liquidation sales with some serious markdowns to be had. Like most liquidation sales, the prices on remaining inventory will get even better as we get closer to the end. If you happen to have an old RadioShack gift card lying around, you may want to hurry up and use it. A judge on Monday approved the request that RadioShack honor the store credits through March 7.
Sprinting to the Future
The chain's long-term survival remains dicey. Even if it's able to restructure its debt and improve its leveraged situation, we're still talking about a concept that's broken. It hasn't posted a profit since 2011, and it's not a matter of being able to cover its debt payments. RadioShack's posted three years of widening operating losses.
RadioShack has a popularity problem. Sales and comparable-store sales have fallen every year since 2010. The chain's big gamble a couple of years ago to emphasize wireless offerings hasn't paid off. The company was hoping that it would hold up better than stand-alone stores run by individual carriers, and even though Best Buy (BBY) seemed to validate the strategy by rolling out Best Buy Mobile stores doing the same thing, it didn't pan out. Consumers tend to prefer a particular wireless carrier, giving this Sprint-RadioShack dual branding some potential legs.
Yes, there is hope within the "store within a store" concept where both brands can win. RadioShack may attract Sprint customers at the store as they tend to their wireless needs, and Sprint can gain subscribers by appealing to RadioShack customers. Trying to be the master of all carriers didn't work, and Sprint -- as the country's third-largest wireless provider but perhaps its hungriest -- could be just what the chain needs to buy itself more time to turn things around.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Want to make 2015 your best investing year ever? Check out The Motley Fool's free report on one great stock to buy for 2015 and beyond.