|Shares Out. (in M):||101||P/E||0.0x||0.0x|
|Market Cap (in $M):||267||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||337||EBIT||0||0|
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RSH is a misunderstood turn-around story with a compelling risk/reward opportunity with a price target of ~$4.75 (+80% from $2.65 on 7/24/13) and downside of ~$2.00 (-24%). The upgrade cycle for mobile phones is set up to drive growth at RSH in the next two years. RSH had to ride out the last two years as carriers elongated their contracts with consumers. That period is now reaching its two year anniversary opening the door for renewed growth at RSH. In addition, a new CEO with excellent merchandising experience from the drugstore industry recently joined the company. Finally, the current valuation of 0.57x tangible book clearly incorporates recent business difficulties as well giving excellent downside protection.
Over the past 2 years, deteriorating EBITDA (48M pro forma in 2012 versus 252M in 2011 and +400M in 2007-2010) was driven by challenges in the wireless handset industry and consumer electronics, generally. With any retailer, declining same-store sales (SSS) and deteriorating Gross Margin (GM) % rapidly impact EBITDA and influence investor perceptions to suggest that a franchise is “going out of business”. Investors commonly overlook what actually drove the underperformance at RSH, namely the elongated Mobile Phone upgrade cycle and the margin but not dollar impact of higher-cost Smartphones. Higher Smartphone penetration came at comparable Gross Profit (GP) absolute dollars per unit, but lower GM %: ($100 GP on a $600 phone is lower GM % than $100 GP on a $300 phone, with the difference typically subsidized by the Wireless Carriers). As a result of the iPhone and other Smartphone launches, Carrier subsidies increased and the payback period extended, especially for Sprint’s 12-month upgrade policy. Instead of subsidizing $200 on a $300 phone over 2 years, Carriers were now subsidizing $400 on a $600 phone over 2 years. In 2H2011, Sprint announced a change to their upgrade policy to 24-months eligibility for trade-ins (from 12-months) and others Carrier soon followed. Immediately, RSH’s unit transactions decreased without the 12-month upgrade stimuli. Furthermore, due to supply chain problems in 2012, RSH was on iPhone allocation and both AAPL and Carriers would ensure their own inventory levels before providing stock to RSH. With new upgrade and product cycles (24-month lapping in 2H2013; 4G LTE promotions; Carrier competition) and initiatives around product assortments and whole-store selling, we believe RSH can achieve SSS momentum and EBITDA growth into 2015.
RSH is a retailer of consumer electronics goods and services through US company-owned RadioShack stores. As of 6/30/13, RSH operated 4,311 stores throughout the US located in strip centers, shopping malls, and individual locations. With a 90 year history, RSH has continually evolved to meet changing consumer preferences and has positioned itself as a destination retailer in convenient neighborhood locations for mobile products, home technology, and consumer electronics.
Beginning in 2007/2008, the company recognized the convergence of “single-use” devices merging into Mobile Phones (phone to wall; weather radio; GPS; alarm; camera) and took proactive steps to address these structural changes in consumer electronics. RSH aggressively pursued “Mobility” as a core strategy and currently receives ~50% of Total Revenue from “Mobility” compared to ~25% before the strategic change. In addition, RSH operates 273 company-owned stores in Mexico and has a network of 982 dealer outlets with 3rd parties (mainly in the US) often engaged in other retail operations that augment their businesses with RSH products, services, and branding. Previously the company operated kiosks at Sam’s Club and Target, but has since exited those channels. RSH primarily operates within 3 platforms:
Catalysts & Opportunities:
Valuation & Assumptions:
|RADIOSHACK CORPORATION (RSH)|
|12-18 Month Price Target ~$4.75… Stress Case ~$2.15|
|CAPITALIZATION||VALUATION & PRICE TARGET|
|Stock (7/24/13)||$2.65||2015-E EBITDA|
|Diluted Shares||100.9||RSH 2015-E Adj. EBITDA||175.0|
|MARKET CAP (M)||267.4||(x)||4.5x|
|5Y 2.5% Unsecured Convert, Aug 13||213.5||(213.5)||-||- Net Debt||(337.4)|
|450M Credit Facility: Term Loan, Jan 16||50.0||-||50.0|
|Credit Facility: Term Loan, Sept 17||25.0||-||25.0||Equity Valuation||450.1|
|2nd Lien Term Loan, Sept 17||100.0||-||100.0||Price Target, EV / EBITDA||$4.46|
|8Y 6.75% Unsec Notes, May 19||325.0||-||325.0|
|- Cash at 6/30/13||(432.0)||213.5||(218.5)||RSH 2015-E Adj. EBITDA||175.0|
|- Restricted Cash at 6/30/13||(32.1)||-||(32.1)||- Interest Expense||(36.0)|
|Assume Next 4 Q Maint Capex||50.0||-||50.0||- D&A||(64.0)|
|Assume Next 4 Q Interest Expense||37.0||-||37.0||Pre Tax Earnings||75.0|
|EV (M)||604.8||Net Income||46.9|
|EV / 2015-E EBITDA||3.5x||P / E (x)||10.0x|
|Price Target, P / E||$4.65|
|6/30/13 Available Credit||386.0||2015-E FREE CASH FLOW (Fully Taxed)|
|Mgmt Estimated Peak W/C Needs (150-200M)||175.0||Net Income||46.9|
|Financial Covenants:||- Maint Capex||(50.0)|
|None; Fixed Charge Coverage related to available credit / borrowing base||Free Cash Flow||(60.9)|
|Price Target, FCF (x)||$4.83|
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