RadioShack’s Uphill Battle

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RadioShack (NYSE: RSH) has seen revenue declines over the past two years, swung to a loss in 2012, and consistently delivers negative net income. And if that’s not enough, margins have been declining and the dividend has been suspended because it was needed for debt reduction. 

Industry changes

If you’re going to purchase an electronics product, then you’re probably going to visit Amazon.com. If you’re not an online shopper, then there’s a decent chance you will opt for Best Buy (NYSE: BBY). And if you’re a serious value shopper, then you might remain loyal to Wal-Mart (NYSE: WMT). Wal-Mart might also be an appealing option because you can shop for other non-technology items while there.

One place that might not immediately come to mind is RadioShack, which is a shell of what it used to be. At one point in 1999, Radio Shack had a market cap of $15.8 billion. Currently, it has a market cap less than $300 million.

In the past, Radio Shack presented a fun and exciting shopping experience. You might have looked forward to buying a remote control car, a coaxial cable, or other gadgets. Today, if you tell someone you’re going to RadioShack, they might shoot you a puzzled look, or even ask, “Why?”

This is because that remote control car is going to be more affordable at Wal-Mart, Target, or Costco. And if you’re looking to browse, you can do so without leaving home by visiting Amazon.com. And if you need to go to a brick and mortar location, then you will find a wider selection at Best Buy. Additionally, RadioShack's staff isn't overly helpful.

Rescue operation

RadioShack hired CEO Joseph Magnacca in February. Some investors felt there was a chance for a turnaround, mostly based on Magnacca’s impressive performance at Walgreen.

Magnacca is in the process of changing everything from RadioShack's colors to its product assortment. According to the company’s website, RadioShack is focused on selling innovative products, operating systems, accessories, applications, and service plans for data, text, and voice.

Radio Shack also offers a Trade & Save Program, which allows consumers to trade-in working electronics toward a new purchase. This makes upgrading easier in a financial sense and it has the potential to drive more traffic to RadioShack stores.

Same-store-sales improved last quarter 1.3% year-over-year for stores and kiosks opened at least one year. This was the first time in three years that comps increased, which is a positive sign. However, profits are still non-existent and will be tougher to get.

Though Best Buy isn’t setting the world on fire, it plans to open 600-800 mobile stores over the next five years. This is bad news for RadioShack, especially since Best Buy is targeting mall locations.

Best Buy has also demonstrated better debt management, sporting a debt-to-equity ratio of 0.48, versus Radio Shack’s debt-to-equity ratio of 1.41. This, combined with a stronger brand, gives Best Buy more potential for a turnaround. 

Boring is better

It should come as no surprise that Wal-Mart is looking to get involved in yet another market. This time, it’s targeting low-priced prepaid wireless services, which should be in high demand going forward. Consumers despise contracts and love simplicity. And Wal-Mart isn’t likely to stop there.

Wal-Mart is far from an exciting investment, but it has long been a profitable one. Unlike RadioShack and Best Buy, margins are positive. Wal-Mart has also improved revenue and earnings annually and its enormous selection of products at everyday low prices consistently drives people to its stores.

It currently yields 2.40%. Based on the company’s quality debt management, the dividend appears to be safe. Wal-Mart does have to deal with competition from dollar stores, Target, Costco, and Amazon.com, but Wal-Mart should be able to maintain market share. As smaller retailers fail, more shoppers will visit Wal-Mart.

Conclusion

If you’re looking for a highly speculative play, then you could do worse than RadioShack. While its new CEO appears to have the company going in the right direction, it may be too late. Best Buy is also high risk, but the odds of a turnaround are better.

Wal-Mart might not be a direct competitor, but it’s capable of stealing market share from both RadioShack and Best Buy. Wal-Mart also comes with extreme product diversification, strong historical stock performance, resiliency to bear markets, and a 2.40% yield. If you're looking for capital preservation, then Wal-Mart is the easy choice. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of RadioShack. 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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