Is This Retailer Finished?

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

In a game of cat and mouse the cat always chases the mouse (with the exception of Tom & Jerry). In the retail industry, whether online or in a physical location, there is a game of cat and mouse going on. Since its peak in 1999 RadioShack (NYSE: RSH) has lost 98% of its market cap to a little over $300 million from $15 billion. RadioShack has been on the losing side of the cat and mouse game for many years now. RadioShack should have implemented changes when Circuit City went out of business a few years ago, but since then BestBuy (NYSE: BBY)) has picked up the slack. After all these years, new management wants to try and strengthen its finances.

Financial statements in turmoil

RadioShack’s first quarter sales were $849 million, which is a huge drop of 66% from $1.3 billion in its fourth quarter. Remember the fourth quarter for retailers is holiday season, so sales should be high because consumers go everywhere to find the products they want. Not a good sign of a turnaround, but rather a sign of the same old stuff with RadioShack. The net income for the first quarter was -$43 million compared to that of the previous quarter’s loss of -$63 million--a 32% increase in net income in six months. RadioShack’s EPS was -$0.43 compared to that the previous quarter’s loss of -$0.63, another 32% increase. RadioShack missed all analyst estimates in the first quarter, which it will probably do in its upcoming second-quarter report July 29.

Income Statement

 

Q1 2013

Q4 2012

Sales

$849

$1,296.10

Net Income

$(43.30)

$(63.30)

EPS

$(0.43)

$(0.63)

Source: Motley Fool, July 17, 2013

The balance sheet is similar to the income statement because it shows declines in cash, total current assets, and total assets. RadioShacks’s cash on hand for the first quarter dropped 18% to $435 million compared to the fourth quarter's cash total of $536 million. RadioShack looks as if it might have to file soon, with $213 million in convertible notes due within several weeks, little to no cash coming in, and a low credit rating.

“Our cash statement is actually very strong as you know we have a payment coming up and we’re not concerned at all we can pay that off in cash,” Chief Executive Joseph Magnacca said in a statement on July 16.

With $1.5 billion in total liabilities the outlook for the near future is dimming. Its total current assets for the first quarter were $1.7 billion compared to a little less than $2 billion for the fourth quarter 2012, which is a 15% drop. With over $2 billion in total assets it has enough to cover itself for a little while longer, but how long can these assets last?

Balance Sheet

 

Q1 2013

Q4 2012

Cash

$434.90

$535.70

Total Current Assets

$1,723

$1,981.90

Total Assets

$2,025.20

 

Short-Term Debt

$212.80

 

Total Liabilities

$1,463.80

 

Source: Motley Fool, July 17, 2013

The cash flow statement shows a little bit of relief for investors with net cash from total operating activities in the green. Net cash for the first quarter was $17 million compared to fourth quarter 2012 net cash of -$43 million, which is a huge turnaround.

 

Cash Flow Statement

 

 

Q1 2013

Q4 2012

Operating Activities

$16.90

$(43)

Source: Motley Fool, July 17, 2013

These numbers are devastating to an investor’s psyche because these figures indicate a sell off as soon as the second quarter report goes public and misses the street’s estimates.

Modifications in motion

In February, Joseph Magnacca, former Walgreen exec, was hired by RadioShack as CEO. This may have been a good idea, but it may come a little too late. One of the first things accomplished by the new CEO was completing a deal to offer Beats by Dre in its stores, which is a popular selling headphone set.

RadioShack is kind of late in this effort because BestBuy already has these types of headphones on display at its stores. This is an effort by the new CEO to turn RadioShack into a modern store. The CEO is cutting back on the turtle (selling at a slow pace) products and replacing some of those with more rabbit (selling at a fast pace) products. The CEO mentioned remodeling all stores and some stores getting what he called a “high touch” display. Every store will be much cleaner and offer better brands than before. The picture below shows us what the “high touch” stores will actually look like.

 

Source: Bloomberg, July 17, 2013

RadioShack’s store sizes are small relative to say an HHGregg (NYSE: HGG) or a Best Buy. In stores the size of RadioShack, it is extremely hard to put many products out for display. This leaves the customers with a limited selection of products to choose from. Why would a customer shop in a store with a limited selection of products when it can go somewhere else like BestBuy, where there are aisles full of choices?

In August 2012, Best Buy hired Hubert Joly as CEO, and he has been terminating stores as a way to cut costs. Best Buy intends on terminating an additional 50 locations in the United States as well as terminating 400 jobs. Most of the jobs that will be terminated are coming from its headquarters in an attempt to save $800 million. Workers have already lost their jobs, and as a result, expenses were cut by $175 million in the first quarter.

In February, Best Buy reduced its product prices so it could better compete and grab back its share from competitors. Another thing Best Buy has done is price matching, which is something this retailer never used to do. Price matching refers to a method utilized by companies to match its rival’s prices for the same products.

In February, HHGregg started a Price Match Guarantee to make sure that customers receive the lowest advertised prices on products both online and in stores, for up to 30 days after the date of purchase. HHGregg will match competitors' lowest advertised prices on in-stock merchandise of the same make and model. The guarantee applies to local brick and mortar competitors as well as a list of major online retailers. The customer does not have to bring a sales flyer to the store, as competitive pricing can be verified by a sales associate. While BestBuy is terminating stores, HHGregg is opening stores like the Dayton Mall location and reopening locations like Southlake Mall.

The word on the street

Many people think RadioShack’s turnaround plan is an attempt to sell the company. "Our job is to really reinvigorate the brand ... to rebuild confidence in RadioShack and bring back those lost generations of folks that we have lost over the last few years," Chief Executive Joseph Magnacca said in a statement on July 16.

That statement throws that theory out of play, but let me give you more clarity as to why a sale would not happen. With its current financial problems, obtaining debt financing to achieve a leveraged buyout transaction would prove to be extremely hard. Then again who would want to buy RadioShack? The new store format is nice and all, but it will not be enough for competitiveness against other retailers with the same products and more of them. The problems facing RadioShack are far greater than transforming stores into more visually appealing locations. Regardless of the transformation the stores are still small in size, which limits its capacity to hold a variety of brands that consumers want.

The Foolish conclusion

RadioShack is a good company trying to dig itself out of the hole it has been in for many years. A new change of scenery and a new CEO could be the miracle RadioShack has been waiting on, but time is running out.

BestBuy maybe the safest play going forward because HHGregg does not have the variety that BestBuy has. A customer can purchase more from one run to Best Buy than they could in both RadioShack and HHGregg together.

If the brick and mortar retailers can turn things around, Best Buy is the best play. Before HHGregg can become a runner up against its rivals, it has to do more than open up new stores and start a price matching effort. A start would be to offer more products similar to the products Best Buy has in its stores. 

A large amount of advertising is needed to get customers back into RadioShack, and it clearly does not have the capital to put on a mass advertising movement. RadioShack is more of a “Mom and Pop” store instead of a big-box retailer like Costco, Target, and Wal-Mart. Investors should be cautious if thinking of buying this stock because this retailer could be finished.

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Gayron Wainwright 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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