Traders who have followed the RadioShack (RSH) tale of woes of the past eight quarters know that the negative sentiment about the stock among Wall Street analysts has gone from ‘looking bad’ to outright ‘death rattle’.  It’s even rumored that a Death Pool has stated to offer gamblers a bet on the exact day of an announced bankruptcy.

Moreover, after RadioShack reported its ninth quarterly loss (much, much worse than expected) and a 14% decline in same-store sales for Q1 of 2014, Yahoo Finance’s news feed has since been swamped with analysts rushing to announce that the stock is worthless.

A Synopsis of the RadioShack Nightmare

With only $61MM of cash in the bank, and an average monthly burn rate of $17.5MM since Jan. 2012, RadioShack will have to rely upon its $362MM credit facility to finance operations.  The company said it has at least enough cash to make it through another four quarters.

“At this rate of cash burn, I think the vendors are going to begin to get nervous,” B. Riley analyst Scott Tilghman told Bloomberg News.  “Their near-term fate rests with the vendors” as RadioShack prepares for back-to-school and holiday seasons.

RadioShack’s total debt totals $614.5 MM, which thankfully won’t become an issue until between 2018 and 2019.  The company said it is responding with the closure of 200 stores and slashing discretionary expenses.

Earlier this year, RadioShack sought to gain permission from creditors to shut down 1,100 of its 4,300 stores, but the company’s lenders flatly disapproved the plan.  The consensus among our peers is that vendors seek a RadioShack bankruptcy on heir terms, not RadioShack’s.

So, What’s the Problem with RadioShack?

Consumer sentiment, for one, hasn’t matched expectations of a recovering U.S. economy, with the latest reading of 81.9 barely reaching the bottom of the wide range of readings prior to the 2008 financial crisis.  Any reading below 85 troubles us.

Electronics retails across the board report slackening demand for consumer electronics, since the spring of 2013.  Additionally, what demand is left has been siphoned away from RadioShack by online sellers.  A full quarter of aggregate electronics sales in the U.S. now comes from the Internet, a medium of which RadioShack has had no success.

Online sales at RadioShack are down 20%, partly due to uncompetitive pricing when compared with rivals Amazon (AMZN) and Best Buy (BBY), and partly due to the the company’s lack of sophistication and price competitiveness on the Internet.

Within the U.S. consumer-electronics market, mobile phone sales have not down well.  Given RadioShack’s merchandise mix of approximately half of its inventory committed to mobile phones, coupled with heavy competition from the likes of AT&T and its no-money-down offer on a new phone purchased at only an AT&T location, RadioShack couldn’t have set itself up for failure any better than it has.  Other carriers have followed AT&T, and a race for market share has ensued, leaving RadioShack markedly uncompetitive.

“The carriers are in a battle amongst themselves in a price war,” RadioShack CEO Joe Magnacca told analysts during a conference call.

“There’s just not a lot of compelling product that’s come out recently, particularly in mobile, and RadioShack is a lot more focused in mobile,” said BB&T Corp. analyst Anthony Chukumba told Bloomberg News.

So, what can RadioShack do?

RadioShack’s Response to the Crisis

Well, nothing can be done about shaky consumer sentiment, but Magnacca is still fighting back.  With RadioShack seeking selling rights to new financing plans from mobile wireless carriers, competition from AT&T, Verizon and company will ease, according to the company’s CEO.

In addition to slashing any discretionary expenses from the company’s P&L, RadioShack seeks to reduce sourcing costs as well as offer more Apple products at its stores, thereby applying upward pressure to gross margin.

“While we face headwinds in our sector of retail, we have a clear vision for RadioShack’s future, and a detailed strategy to turn the business around,” Magnacca said on Q1 conference call to investors this week.

Overall, we wish there were more to report regarding the RadioShack turnaround plan, but no further details to cogitate are available at this time – which leads us into out idea for a RSH trade alert.

But . . . What If 

But, what if additional measures or positive events, or anything, are announced from this left-for-dead Texas-based retailer?  As the stock price approaches the critical NYSE de-listing level of $1, it’s not beyond any company to issue an upbeat news release as a means of affecting a short squeeze.  It’s an old trick.  And in the case of RSH and the avalanche of negative press, the set up is indeed there for a massive short squeeze.

The short interest in RSH is estimated at 30% of share outstanding.  Our thinking on a RSH play is, not that the company may surprise Wall Street (and us) and avoid bankruptcy, though it is theoretically possible (of course), our thinking focuses on a potential set-up trade as the stock approaches $1.

Trades like the one we see coming could yield a 10% or 20% quick profit from a RadioShack ‘new release ambush’ (as we call this set up at Jason Bond Picks).

Essentially, we agree with Scott Tilghman, who said there is a “better-than-50-50 likelihood” of a creditor-induced bankruptcy.  However, that doesn’t mean there isn’t a profit to made in RSH on the long side.

Along with bottom-fishers who are expected to come in at the $1, we also expect RadioShack to make an announcement to rattle the shorts as the stock drifts lower to that price level, with the intent of punishing traders who weigh on the stock during the last-shot effort to turn the company around.

Watch the $1 level and volume very carefully.  Those with risk capital may decide to take a ‘flyer’ on a short squeeze at the $1 price level.  These trades can produce exciting action and quick profits throughout a few days of trading.  Going forward, RSH is definitely on our watch list for a potential melt-up trade.