NEW YORK (AP) — Shares of Radioshack tumbled more than 10 percent Friday after Standard & Poor's said the retailer could default within a year and downgraded its credit rating.
THE SPARK: The ratings agency cut Radioshack's corporate credit rating one notch to "CCC" from "CCC+." A "CCC" rating means the company is vulnerable and dependent on favorable business and other financial and economic conditions to meet financial commitments.
S&P said that a default was possible within the next 12 months "absent a major business turnaround or increased liquidity."
The agency's rating on Radioshack is negative, meaning another downgrade could be forthcoming.
BACKGROUND: RadioShack has been cutting costs, shuffling management and updating stores and products as it struggles to compete with online retailers and discount stores. CEO Joe Magnacca, who came aboard in February, has said he expects a turnaround will take several quarters.
In July the Fort Worth, Texas, company posted a broader quarterly loss, but revenue topped Wall Street expectations. It has enlisted business advisory firm AlixPartners and investment banking firm Peter J. Solomon Co. to assist in a recovery.
S&P also revised its view on Radioshack's liquidity to "weak" from "adequate."
"We do not believe the company will generate any free operating cash flow in 2013 given its poor profitability," wrote S&P analyst Nalini Saxenwrote. "With the cash paydown of $214 million of maturing convertible notes, we estimate the company has approximately $215 million in cash and $385 million in revolver availability."
The company said in July that it had total liquidity at $818 million at the end of the second quarter. It did not immediately respond to a query about the S&P downgrade, which arrived late Thursday.
ANALYST COMMENT: Janney Capital Markets analyst David Strasser said the downgrade highlights RadioShack's challenges but added he thinks the company is taking steps in the right direction.
"We agree that this transformation is going to be challenging, and we have no misgivings about these challenges," Strasser wrote Friday. "But at the same time, we believe that Mr. Magnacca and his team are qualified and the right people to give this turnaround a credible and legitimate chance to succeed."
SHARE ACTION: RadioShack Corp. fell 30 cents to $2.58 during midday trading. The stock has traded between $1.90 and $4.28 over the past 52 weeks.
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