Can RadioShack Survive Another Year?

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

Since its founding in 1921, RadioShack (NYSE: RSH) has stubbornly weathered sixteen recessions, numerous technological revolutions, and more than its fair share of innovative competition.  That said, it seems a massive understatement to say 2012 was a tough year for the struggling electronics retailer.  

After posting two terrible earnings reports to start the year, the company followed up by suspending its previously-doubled dividend in July.  Then, after investors were forced to suffer through the abrupt departure of CEO James Gooch in September, the company reported dismal third quarter earnings in  which it achieved its first EBITDA loss in more than five years.

With shares of RSH down more than 78% year-to-date and seemingly left for dead, many investors are left wondering whether the stock has found its bottom.  Make no mistake, though, my fellow Fools: Even at Friday's bargain-basement close of $2.11 per share, RadioShack still shouldn't be considered cheap.

What Happened? 

With its signature small-format stores facing increasingly-fierce competition from the likes of Best Buy (NYSE: BBY)Amazon.com (NASDAQ: AMZN), and Wal-Mart (NYSE: WMT), RadioShack has been helpless to stop the relentless decline of its bottom line.   

That's not to say the company hasn't tried.  After all, in an effort to reclaim its 1980's "cool factor," the company did re-brand itself "The Shack" in 2009.  Unfortunately, even if we put aside The Shack's awkward propensity for referring to itself in the third person, the company's ongoing failed attempts to reinvent its image shows just how hard it can be to change a brand consumers have known for nearly a century.

Later in 2009, RadioShack also partnered with Target (NYSE: TGT) in a deal to staff employees at postpaid mobile kiosks in more than 1,500 Target locations.  In theory, riding on the coattails of a stronger retailer should have helped RadioShack offset revenue declines in its primary business with little overhead cost.  In reality, the deal has primarily served to enrich Target shareholders while RadioShack continues to lose money at an accelerating rate.  Even now, though RadioShack is once again trying to revise the terms to find a mutually-beneficial common ground, the company outlined preparations for exiting the agreement by April if it can't get its way.

Even scarier than its previous turnaround efforts, however, is management's inability to provide a clear vision for achieving success going forward.  While they were right in recognizing their signature business can't compete with the deep pockets of other big-box retailers, they still stubbornly insist RadioShack's primary business catalysts lie in becoming a preferred destination for mobile devices and high-margin accessories.  Once again, this "strategy" should leave investors skeptical; though a strong selection of mobile accessories could serve as a good way to supplement an otherwise-thriving business, it can hardly be considered a viable method of propping up the entire organization.

What Now?

With $938 million in total liquidity, including $546 million in cash at the end of last quarter, RadioShack still has some cash at its disposal to give itself a fighting chance.  In addition, with current assets of $1.92 billion and liabilities of $1.57 billion, simple arithmetic tells us RadioShack is currently worth around $350 million.  With a current market capitalization of $210 million, a buyout is certainly within the realm of possibility.  

Who, then, would be interested in buying RadioShack?  The broader business scope of its competitors ensures most of them would have little use for its assets, so it seems another specialty electronics retailer like Best Buy represents the most likely suitor.  After all, an acquisition would seem a natural extension of Best Buy's efforts given its recent push into smaller format stores, despite RadioShack's failure to capitalize on the same model.  

However, given Best Buy's recurring distractions in the form of a founder bent on taking the company private and increasing online competition from retail behemoths like Amazon and Wal-Mart, something tells me shelling out a few hundred million bucks for a dying brick and mortar retailer isn't exactly at the top of its to-do list.  Furthermore, RadioShack's current margin pressures show no signs of easing, and the company continues to burn cash at an increasing rate.  In any case, rather than buying RadioShack now, why shouldn't Best Buy wait until it can pick up the assets on the cheap in bankruptcy proceedings?

Foolish Bottom Line

With shares of RadioShack hovering near 52-week-lows, investors need to remember this stock is cheap for a reason.  Even if the company manages to stop losing money using its current business model, it would still need to undergo a radical transformation to differentiate itself against its competition and prove worthy of a spot in your portfolio.

In the end, with no profits, no dividend, no permanent CEO, and no clear vision for its future, there's little to stop The Shack from crumbling to the ground.  Until RadioShack can convince me otherwise, my "Underperform" CAPScall will remain.


Steve Symington has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and RadioShack and is short RadioShack. Motley Fool newsletter services recommend Amazon.com. 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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