The End Could Be Close for RadioShack
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RadioShack (NYSE: RSH) has a storied history. Somehow, the 90-year-old retailer has managed to survive multiple periods of transformation in the electronics industry.
But this time might be different. Shares of RadioShack have lost more than 85% of their value since the beginning of 2010. The company reported a worse than expected loss back in July, and ratings agency Standard & Poor’s warned that the company could default on its debt within a year.
RadioShack knows that it needs to change -- the company is planning to renovate its stores with new displays in the hopes of bringing back consumers. But would-be shareholders should be aware of the challenges facing the company.
Is RadioShack still relevant?
RadioShack is really facing a fundamental problem: is there still a reason for it to exist?
Increasingly, the answer appears to be “no.” That 85% share decline has been accompanied by a steady drop in same-store sales and a dwindling cash balance. Last quarter, same-store sales actually increased by 1.3%, a surprising uptick. But that was accompanied by an operating loss of $41 million -- about a 300% increase from the previous year.
In the two quarters before that, same-store sales dropped (5.7% in the first quarter, and 7% in the fourth quarter of last year).
RadioShack’s answer is to remodel. In the last few months, the company has rolled out a handful of “concept” stores featuring unique displays (Twice has a photo walk-through of the remodeled Manhattan location.). Better looking stores should help, in theory, but it’s far from a guarantee. RadioShack still sells mostly commodity products that are available in numerous other stores and online.
Consider J.C. Penney: former CEO Ron Johnson spent hundreds of millions of dollars remodeling the retailer to no avail. Same-store sales dropped dramatically during his tenure.
On the flipside, stores like Wal-Mart and Costco wouldn't win any visual awards, yet their businesses continue to dominate their respective retail sectors.
Competition in the space is intense
Moreover, RadioShack isn't the only company remodeling. Its big box competitor Best Buy (NYSE: BBY) is in the midst of its own turnaround, while wireless carrier AT&T (NYSE: T) is also focusing on its retail arm.
Best Buy’s new CEO, Hubert Joly, has executed a turnaround plan focused on cost-cutting, bolstering the store’s online operation, and partnering with major electronic firms for mini “store-in-store” concepts. Apple’s success over the last few years has been bolstered by its retail arm. Apple’s stores give customers a place to demo and learn about its new products, as well as receive tech support from knowledgeable employees.
Samsung and Microsoft, observing Apple’s success, have shown interest in replicating the strategy. Both companies have signed agreements with Best Buy to set up shop within larger Best Buy stores.
Analysts have praised Best Buy’s moves, including those at Jefferies, who raised their price target to $35 last month (shares are currently trading near $30).
Meanwhile, AT&T has also unveiled plans for a stronger retail operation. Although most would not view the wireless carrier as a direct competitor, RadioShack’s focus on mobile phones (the company said wireless accessories were a key driver of growth last quarter) could be hampered by AT&T’s new strategy.
AT&T has built its first concept store in Chicago, and plans to roll out the design to 2,300 stores by 2014. Bloomberg calls AT&T’s new design a “blatant knock-off” of Apple’s stores -- but that could be a good thing for AT&T.
With AT&T focusing on its retail operation, it may mean that more subscribers are going to the AT&T store to buy their phones and accessories -- not RadioShack. AT&T is far from the only carrier, but it does have nearly a third of the market. Moreover, if its strategy is successful, it would not be unreasonable to assume competitors like Verizon and Sprint would follow suit.
Could the company be acquired?
But what about an acquisition? RadioShack’s retail stores could be attractive to a would-be acquirer, and companies like Best Buy or Amazon could be interested.
While that might be possible, the likelihood isn't enough to prompt an investment in the company.
Wedbush’s Michael Pachter dismissed the notion of Best Buy buying RadioShack. He noted that while a smaller-store format would help Best Buy thrive, the retailer has (unfortunately) entered into long-term leases. For now, Best Buy is stuck in its big stores, and likely couldn't afford to take on RadioShack’s operating expenses.
Amazon’s CEO Jeff Bezos has said he'd be interested in a retail operation, but only if his company had a new and interesting take on the idea. He told Charlie Rose that the market for physical retail stores is already pretty well served.
RadioShack’s real estate holdings are far from substantial. The company only owns two stores, though it does have thousands of leases. On its balance sheet it lists the total value of its plant, property and equipment at around $210 million, a mere fraction of its debts, which stand in excess of $700 million.
Investing in RadioShack
On a purely financial basis, RadioShack appears to be trading at a discount. Its book value per share stands at $5.08, nearly double the current share price.
However, RadioShack is facing an existential crisis. The company is attempting to salvage itself with an aggressive store remodeling, but its competitors aren't standing still -- Best Buy is undertaking its own turnaround plan, while AT&T is making a concentrated push to revamp its retail experience.
With a short float near 40%, any improvement in the company’s core business would likely trigger a strong price appreciation. Yet, that improvement appears unlikely.
As Pachter has said, this is one company that could be out of business in less than two years.
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Sam Mattera owns shares of Best Buy. 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!