Stay Far Away From This Retailer

Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite RadioShack's (NYSE: RSH) many problems, some investors still believe in the struggling retailer. In “RadioShack’s Turnaround Plan Has a Glimmer of Hope,” Motley Fool analyst Blake Bos cautiously explained why RadioShack could possibly turnaround. Then last week, an article appeared in the Wall Street Journal that also offered thoughts on a possible reversal for the cash-bleeding company.

Call me a pessimist, but RadioShack isn’t going anywhere except bankruptcy. Here’s why:

Dot-com shopping

It’s no secret that online competition played a principal role in RadioShack’s fall. Since 2004, e-commerce has been growing, especially in electronics.

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Source: US Census Bureau

As you would imagine, Amazon (NASDAQ: AMZN) is a major beneficiary of the trend. In 2012, Amazon’s electronics sales increased 34.5% to $38.62 billion from $28.71 billion the year before. Compare that to RadioShack’s sales decrease of 3.5% to just $4.3 billion in the same year.

As far as net income is concerned, RadioShack lost $139 million in 2012. Amazon also posted a loss on the year of $63 million, but that was expected due to Amazon’s investments in the Kindle and infrastructure. In quarter two of this year, Amazon posted another loss of $7 million, or $0.02 per share despite strong revenue growth of 22%. 

Amazon CEO Jeff Bezos said that losses are to be expected because Amazon is investing in the future, which Bezos sees as tablets and digital content through Amazon Prime. Bezos knows what he's doing, and apparently, so do investors: Amazon's stock increased by 20% so far this year despite the losses.

While Amazon is looking to the future, RadioShack is still trying to make sense of the present. How can RadioShack compete with the incredible selection and affordability of Amazon? I don’t think it can. Online shopping is making many stores irrelevant, and RadioShack was hit particularly hard. Consumers turned to the web, and RadioShack watched them go.

Often, customers “rent” HDMI cables and other essentials from RadioShack before returning them once the same product is ordered for $2 on Amazon. The only reason consumers would need to enter a store is if they wanted to test a product or see it in action. But if that is the case, why go to RadioShack when you could go to the firm’s larger competitors?

Bigger and better

When it comes to brick-and-mortar competition, RadioShack’s arch-nemesis is Best Buy (NYSE: BBY). While Best Buy hasn’t exactly been hitting home runs recently, the world’s largest electronics chain managed to stay afloat amid the growing online shopping trends. Best Buy’s larger inventory and consumer-friendly stores pushed RadioShack even further behind.

Best Buy’s 2012 revenues of almost $50 billion dwarfed RadioShack’s $4.3 billion. In the first quarter of 2013, though both companies took a loss, Best Buy’s loss represented only 0.86% of revenue for the quarter, while RadioShack’s loss represented 5.1% of quarterly revenue. Both stores are losing money, but Best Buy has a much larger cushion on which to land. Moreover, Best Buy has much greater capital at its disposal to fight back to profitability.

In an effort to improve the buying experience at his company, RadioShack CEO Joseph Magnacca is remodeling 10% of stores in the US. The new format will be more open, and will feature enticing touch-screen displays (sounds like Best Buy Jr. to me). According to Magnacca, RadioShack is “sending a message that we are not your grandfather’s RadioShack.”

Unfortunately, I don’t think it will matter what kind of message RadioShack is sending. Even Best Buy is hurting, and if the most successful brick-and-mortar electronics retailers are having trouble, smaller firms like RadioShack don’t stand a chance.

If not tablets and smartphones…

Then what? RadioShack suffered in part because it tried to change with the market; i.e. sell more smartphones and tablets. However, this plan backfired because RadioShack couldn’t sell enough of the gadgets to make up for the lower margins that the devices carry. So where does that leave the firm? Tablets and smartphones represent the hottest electronics in the industry, so opting out of the market isn't a viable option.

Traditionally, RadioShack made its living selling cables and slightly more unusual electronic gear. But in today’s market, that model isn’t sustainable. Tablets and smartphones are growing faster than any other segment of electronics (tablet and smartphone shipments are expected to grow by 174% and 109% respectively by 2017), so retailers wanting to remain relevant must find a way to sell these popular devices.

Bottom line

My bearishness on RadioShack can be summarized by this line from a WSJ article: “There just isn’t a compelling reason for people to shop at RadioShack.”

Exactly. RadioShack’s stores are small, its product mix is mediocre, and competition from both online and physical retailers is too strong. There are simply too many better options available to consumers, and RadioShack giving 10% of its stores a facelift isn’t going to fix that problem.

I admire Magnacca’s effort, but he’s fighting a losing battle. And eventually, bankruptcy will rear its ugly head. 

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

This article was written by Randy Holcombe and edited by Marie Palumbo and Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. None has a position in any stocks mentioned. The Motley Fool owns shares of Apache. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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