Can RadioShack Turn Things Around?

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

There are few companies in greater need of a new image than this 94-year-old company that lost $194 million last year -- a company that continues to struggle amidst changes in consumer purchasing habits and soft sales. Many analysts lump this company in with companies such as GameStop and Best Buy (NYSE: BBY) -- companies that many believe will hang around for a few more years until consumer habits change and the inevitable happens: They fail to adapt to the ever-changing marketplace and go bust.

Cheap capital and a decent balance sheet

RadioShack (NYSE: RSH) -- a junk-rated retailer -- has sought to allay investor concerns that it could run short on cash. Currently, this company has more than $800 million of cash on hand and money available through borrowing. And this company is working with various investment banks to evaluate ways to strengthen its financial position. That is because “the Shack” is hoping to raise money ahead of the fall, when it will be stocking up on inventory for major promotional events that typically occur during the critical holidays.

Making the right moves

In addition to fixing its balance sheet, RadioShack appears to be doing all the right things. A few months ago, for example, the company hired Joseph Magnacca, a former Walgreens marketing maverick. Since acquiring Magnacca, RadioShack has dramatically improved its product mix and marketing campaigns. The strategy is relatively straightforward: carry hot-selling items that will generate traffic, narrow offerings in slow-moving categories, bring in high-margin private label goods, reduce clutter, and improve the shopping experience. A few weeks ago, after work, I walked past a RadioShack store on a busy Manhattan corner that had touchscreen displays and appeared to have undergone significant remodeling. Although this renovation is admittedly probably on the high end of the remodeling efforts given that it is in Manhattan, it is symbolic of a brand that is both at a critical juncture and in transition.

No longer a showroom

A few years ago, many analysts predicted that RadioShack and Best Buy were going to go belly up like Circuit City. They believed that Best Buy and RadioShack were becoming showrooms for consumers. Customers go into stores to better understand the features and benefits of products. Then, they purchase those products more cheaply through Amazon or eBay. Or so the story went. As we know, though, Best Buy responded to its naysayers by price-matching the online retailers, and most of the retailers followed suit. As a result, over the past six months, Best Buy’s shares have gone on a tear, rising from a low of slightly more than $11 to over $30. In fact, over that time period, Best Buy was the best performing stock in the S&P.

Being small has its advantages

Similar to Apple (NASDAQ: AAPL) and Best Buy Mobile stores, RadioShack stores are now focusing on creating an interactive, engaging experience for the consumer. RadioShack’s new layouts appear to hit the sweet spot of having the right mixture of low-margin, highly sought-after products that bring people into the store, and high-margin products that both increase transaction size and ensure profitability once the customer is inside. That is a strategy that both Apple and Best Buy mobile stores have successfully executed. And by reducing the number of product offerings and its overemphasis on smartphones (unlike Apple and Best Buy) RadioShack will be well-positioned to quickly adapt to trends and changing market conditions as well as to experiment with various store designs. All in all, RadioShack is attempting to use its size, which many previously considered to be a significant constraint because its small store size and limited product selection relative to its competitors made it harder to attract customers, into a competitive advantage.

It's no Apple

I have visited Apple stores in the United States and Europe.  Apple does a great job with its well-designed, clean, clutter-free stores that scream cutting-edge technology and sales force that serves as an extension of its brand. Yet moving forward, drawing traffic to these stores will depend on Apple's ability to innovate, given that these stores have few product offerings.  By contrast, although RadioShack's stores currently aren't as sleekly designed, they are making significant progress on both fronts: store design and product offerings.     

3 critical considerations

1. Price and market cap – RadioShack shares have lost approximately 90% of their value over the past three years. This company has annual sales of $4.3 billion, yet a market cap of only around $290 million. RadioShack has $435 million available in cash, which is more than its market cap.

2. Dividend yield – Not all that long ago, RadioShack had predictable earnings and paid a generous dividend of $1.50 per share. If RadioShack could once again become profitable and re-institute a reasonable dividend, its share price could easily double, triple, or even quadruple.

3. Market and sector performance – As shown by Best Buy’s resurgence, the sector appears to have put the worst behind it. Still, RadioShack’s share price and market cap appear to unfairly assume the worst-case scenario: that any efforts to turn around the business will not succeed and RadioShack will eventually go bust (unlike other stocks in the sector).

My Foolish take

Although I don’t like the images and associations that are top of mind when I hear the word RadioShack (geeks fooling around with ham radios and such), I agree with Mr. Magnacca’s message that this is not my grandfather’s RadioShack. Price matters and at around $3 per share, even though this company is not without substantial risk, the risk/return is almost attractive enough to consider making a small bet. After all, everyone has already assumed the worst for this struggling company and that is more than reflected in its valuation.

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Ryan Peckyno has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and 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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