RadioShack's Turnaround Plan Fails To Address Its Biggest Problems

• MARGARET BOGENRIEF, ACM PARTNERS

Richie Rich/flickr

 

Margaret Bogenrief

Margaret Bogenrief is a partner with ACM Partners.

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Former electronics retail juggernaut RadioShack is in trouble. 

And, given the details of management’s most recent restructuring “plan” as presented to (and eventually rejected by) creditors, it appears the retailer is more at risk than ever before.

First, a breakdown of what’s breaking down at RadioShack. On March 4, management presented to creditors, in a bid to buy time and liquidity, a plan to shut down 1,100 “underperforming” stores (approximately 20% of the retailer’s 5,200 U.S. locations).

By May 8, however, creditors had rejected the plan, putting the retailer on the fast track toward bankruptcy. And while it may appear counterintuitive to those who don’t work with troubled companies (and therefore understand the ins and outs of the processes involved) that creditors would reject a plan seemingly designed to keep the retailer out of (more) trouble and an inevitable filing, here’s why they were right, based on assumptions implicit to the plan, to reject the inept attempt at a strategic turnaround:

• RadioShack management assumed in its turnaround plan that as a result of the closing of 1,100 stores, it would naturally follow that the decline in same-store sales (nearly -10% as of 2013) would immediately halt.
• Furthermore, through the closure of these locations as outlined in the plan, RadioShack would have, in essence, created an $800m division of underperforming stores, creating a process that management assumed would remain cash neutral. 
  • Assuming these locations have approximately $150m in inventory, the plan created a significant hole in RadioShack’s ability to borrow just at the time the company is facing severe liquidity pressures. In short, management assumed it could close locations at an almost inhuman speed, resulting in a plan that better resembles an attempt to catch a falling knife.
• Management also posited, on a pro-forma basis (pending store closures — see breakdown here), that while net revenue was projected to decline nearly $800m (from $3.43b in 2013 to $2.642b in 2014) — and assuming a streamlined gross margin 34% from 2013 — this turnaround plan would have resulted in generating nearly half as many gross profit dollars as the company did in 2010 (from $1.17b to $901.8m). 
  • In order to turn EBITDA break-even, then, SG&A would have had to drop nearly 35%.
• Finally, management assumed that the company’s current leadership team possessed the skillset necessary to oversee the closing 1,100 stores while balancing the severe liquidity and strategy issues that threaten to strangle the company by October 2015.

In short, RadioShack management’s proposed turnaround plan as presented to creditors posed several dangerous assumptions (despite the fact that RadioShack currently has undrawn borrowing capacity) that failed to tackle the most immediate issues threatening the store.

So what’s next for RadioShack?  Most likely a fight to secure emergency financing, the filing of Chapter 11 — and the ultimate closure of approximately 1,500 stores — and a strategy to emerge that includes expansion into and securing licensing in foreign markets. But at this point, however, given my lack of exposure to the case, I can posit as such as only conjecture.

Whatever happens, it’s clear that the current management team needs significant help in creating and executing a truly efficient and effective turnaround plan. Otherwise, if an operational plan isn’t put in place — and soon — RadioShack could find itself in a very ugly situation. 

With management most likely wishing leadership had put more thought and time into planning once upon a time.

Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and turnaround advisory firm serving companies and municipalities in financial  distress. Furthermore, she is a joint Masters in Business Administration and Masters in Public Policy graduate of the University of Chicago.

This article originally appeared at ACM Partners. Copyright 2014.

Read more: http://www.businessinsider.com/what-radioshacks-rejected-plan-teaches-us-about-turnaround-around-retail-2014-8#ixzz3AroQoTBj