Dwindling Options for RadioShack
Timothy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On July 11 shares of electronics retailer RadioShack (NYSE: RSH) fell by as much as 20% on news that the company was considering hiring a financial adviser in an attempt to fix its balance sheet. The stock recovered quite a bit later in the day, but it still sits well below its high of $4.28 per share reached in May. RadioShack is facing the challenge of remaining relevant and since 2012 has been unable to turn a profit. This has put strain on the company's finances, leading many to assume that a bankruptcy is inevitable.
But is there any value in RadioShack? Or should the company and the stock be left for dead?
A deteriorating balance sheet
Back in December I wrote an article about RadioShack, at a time when the stock was trading for $2.23 per share, which pointed out that the company's market capitalization was less than its current assets minus its total liabilities. This is called a net-net, and it's a pretty good indication that the stock is cheap. The stock nearly doubled from that time to its peak in May, and now it is right around that initial level again. But the company is worse off now than it was six months ago, thus warranting a second look at the balance sheet.
Q2 results won't be reported for a couple of weeks, but the situation after Q1 wasn't good. Revenue declined by 15.8% year-over-year while the net loss grew to $35 million from $8 million in the same period last year. Losses seem to be accelerating, making the picture quite a bit more dire than it was last December.
RadioShack is valued at about $250 million by the market. The company still has $435 million in cash, but $213 million in debt matures within a year and another $499 million matures after that. Now, if you simply take the current assets and subtract the current liabilities you arrive at $259 million, just about the current market capitalization. This value is essentially the liquidation value assuming that fixed assets are worthless.
The big problem with this is that it assumes things like inventory could be liquidated at the value carried on the books. This typically isn't true, though, and this issue is compounded by the fact that RadioShack has seen its inventory balloon over the last year. At the end of the first quarter last year inventory levels sat at $730 million. It now sits at $927 million even as revenue has declined. What does this mean? It means that RadioShack can't sell its merchandise.
In any liquidation scenario the inventory will likely be discounted significantly. If we discount the inventory by 50% the company is for all intents and purposes worthless. I expect that we'll see some inventory write-downs at some point.
This makes RadioShack shares undesirable at almost any price. That's not to say that the stock can't go up, but the company is in big trouble. Back in December, with the stock at $2.23 per share, the company was being valued at a 35% discount to the current assets minus total liabilities. Now there is no discount, and because losses are accelerating the stock looks more and more unattractive every day. The stock becomes interesting well below $2 per share, and paying more than that is more hopeful than anything else.
No turnaround in sight
RadioShack can probably survive for a year, maybe two, if losses continue. A turnaround at this point seems extremely unlikely. A big problem, I think, is that many people probably don't know what RadioShack even sells. Younger people especially have no reason to venture inside of a RadioShack, leaving the company's customer base dwindling. It's possible that someone will step up and buy the company, but there doesn't seem to be much benefit in doing so.
This is situation where a big-box format might actually be better. Best Buy (NYSE: BBY), which operates far larger stores than RadioShack, has been able to turn itself around under new management. The stock has rebounded sharply over the past six months, surpassing $30 per share for the first time since 2010, and improvements in the supply chain and the company's management structure are working to cut costs and improve competitiveness.
It's unclear what options RadioShack has. A resurgent Best Buy will draw even more customers away, and appealing to younger customers may very well be impossible for the company. Amazon (NASDAQ: AMZN) and other online retailers are mostly responsible for RadioShack's demise, and while Best Buy is making strides to improve its website and grow online sales RadioShack is not. Here's an example: on RadioShack's website the cheapest HDMI cable is $7.99 plus sales tax plus another $6.99 for shipping. Who in their right mind would order from RadioShack when the same item can be had at Amazon for around $3. Best Buy is also cheaper at about $4 with free shipping.
The bottom line
Buying shares of RadioShack is an unattractive proposition at this point. With no real push to sell online and no clear direction, RadioShack is just treading water until its demise. Inventory is out of control and debt payments are coming due. If the current cash burn continues it will be at most two years until the company is gone. I don't see a turnaround happening, and other than speculation there's just no reason to buy the stock.
The television landscape is changing quickly, with new entrants like Netflix and Amazon.com disrupting traditional networks. The Motley Fool's new free report "Who Will Own the Future of Television?" details the risks and opportunities in TV. Click here to read the full report!
Timothy Green owns shares of Best Buy. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com 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!