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The demise of Circuit City wasn't a herald of an industry consolidating in order to grow, but rather, a warning of an unsustainable business model that has since left rivals from RadioShack (NYSE: RSHCQ ) to Best Buy (NYSE: BBY ) reeling.
The latter believes it can still survive, but it will likely be as a privately-held company that its founder will run out of the public spotlight. It may also be a solution for the former, as well, as the klieg light glare of management's focus on low-margin smartphones and tablets is blinding them to how far the electronics retailer has fallen. They might not go bankrupt, but the peril for investors remains the same.
Hanging up on growth
This year hasn't been kind to RadioShack, as it lost three-quarters of its stock's value. It seemed a conscious decision by management to transform the company from one that traditionally sold all manner of consumer electronics to one that focused almost exclusively on mobile communications, as a means of temporarily masking deep-seated problems: revenues increased due to smartphone and tablet sales, but margins wasted away.
Now, even the rollout of mobile phone kiosks at Target (NYSE: TGT ) stores hasn't dialed up the sales numbers the way it was supposed to, and it may soon abandon the 1,500-store project. They're writing off $25 million related to the venture and, if Target doesn't agree to new terms, it will walk away. Not that it's any skin off the discount retailer's back; both Best Buy and Apple (NASDAQ: AAPL ) are also testing store-within-a-store concepts at Target . Perhaps investors would do better betting there, as everyone wants to be its partner.
A cyber takedown
Also done in by the switch was the company's dividend, that had previously been paid for 25 years. It suspended the payout in July, and began laying off employees to conserve cash. The advent of Internet retailing has been too high of a hurdle to get over, and even as Amazon.com (NASDAQ: AMZN ) finds fewer and fewer sales tax havens among the states, the ability of bricks-and-mortar retailers to compete against the onslaught has been seriously diminished.
It just may be that the seeds of hope are in being a smaller operator. The kiosk model, while extreme, could provide the necessary growth tools that RadioShack needs, as shrinking its footprint could help it limit its expenses. The sprawling electronics superstore is a relic of a bygone time that's only possible now digitally. Amazon can offer dozens of models and price points, because the bandwidth to do so is cheap. Real estate, even these days, is not.
That's why we see lots of retailers, from Wal-Mart (NYSE: WMT ) to Home Depot (NYSE: HD ) eschewing the big box design, and moving toward smaller square footage stores. Best Buy is doing it, too, and its stand-alone mobile stores are the model RadioShack may want to copy.
I'm not sure its international expansion plans as part of the go-small concept are right for it, particularly as it moves into Asia. Earlier this summer, it started a joint venture with Cybermart to operate small-format retail stores in China, Taiwan, Hong Kong, and Macau. It smacks of merely throwing something at the wall and hoping it will stick and, with competition already intense in Asian markets, the last thing RadioShack needs is another business line that will put pressure on profits.
At around $2 a share, the electronics retailer sells at a fraction of its sales and book value. And, though at times it can mean an opportunity to buy a company cheap, like the Circuit City bankruptcy, it can mean something completely different. In this case, it signals a company in trouble.
I said a few weeks ago that I don't think RadioShack can fight the tide much longer. I don't think it will follow its peers to bankruptcy; but, rather, I think someone may come along to buy it out. Private equity might be able to carve it up in a going-private transaction that would shed its best businesses, whatever they may be these days. As bad as 2012 has been, I don't see next year getting any better, and don't recommend investing in the company, even at these distressed levels.
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