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Yesterday, shares of RadioShack (NASDAQOTH: RSHCQ ) plunged; they closed down 11%, but had fallen 18% during the trading session. The question for high-volume broadcast: Who the heck thought that stinker could be a hit? This company, which resides in penny stock territory, is currently up 24% year to date, after having jetted to $4.28 per share at one point in the spring. Some people obviously made the bet.
Today, RadioShack has clarified rumors that it's looking for an advisor to do a financial facelift, which had sparked liquidity fears, explaining that it's simply trying to strengthen its balance sheet. However, the idea that RadioShack's got trouble still goes without saying.
Berber carpet won't help
Even if the clarification alleviated investors' imminent panic, it doesn't change this retailer's weak position. As of the 12 months ended March 31, sales fell by 1.9%, and the company posted a significant loss of $1.69 per share. Despite RadioShack's assurance of $820 million in liquidity, its total debt-to-capital ratio is 55.9%, an uncomfortable level for a company that's floundering.
Under new CEO Jack Magnacca, RadioShack has been trying to slap some coats of paint and trim on the deteriorating shanty. In one of its most recent attempts at modern cool factor -- the equivalent of placing Berber carpet and granite counters into a house with cracks in the wall -- RadioShack has announced new ideas, such as dedicated in-store displays peddling fitness tracking products like Fitbit.
RadioShack's more interesting plan is to plant "concept" stores to lure "tech-hungry shoppers who will find a new level of products, service and excitement in a store that makes the buying experience fun." These stores will feature products from companies like Apple, HTC, and Samsung. The first "concept store" just opened on Broadway in New York City.
That may have been a great idea had it come way ahead of the curve, but the old adage, "Build it and they will come," doesn't apply here. Plus, opening up shiny new stores seems odd for a retailer with an old-fangled brand that is already over exposed: There are 4,300 company-owned RadioShack stores in America.
Meanwhile, somebody didn't get the memo. This echoes rival Best Buy's new stores-within-stores concepts, highlighting products from Microsoft and Samsung, but these really won't do much for business if bricks-and-mortar showrooming, and online purchasing elsewhere, are in, and actual paying customer traffic's lagging.
Maybe investors should condemn this Shack
Investing in stocks like RadioShack, and its electronics rival Best Buy, are bad ideas for investors. These days, though, there's an added temptation: snapping up such stocks at supposedly "cheap" prices, particularly given the crazy market rally where just about any old stock seems to be rising, and big time. When all the stock prices are floating higher, it's even more dangerous to give stocks like these the benefit of the doubt. Some struggling companies' stocks are currently like mini-bubbles, destined to pop when reality sinks in (and we're not talking positive pops).
Whether or not one believes that Amazon.com's (NASDAQ: AMZN ) current stock price is justified, one investment opinion that is completely justified is the Internet giant's retail strength. In sharp contrast to RadioShack's depressing trading day yesterday, Amazon shares have stepped over the $300 per share mark as we speak. Investors might want to wait for temporary weakness to buy in, but intrinsically, this is a far stronger company.
Amazon's got an excellent brand, a strong balance sheet, and a variety of other advantages, including discount pricing, total convenience, amazing product selections, and customer loyalty and stickiness. It may sound crazy, but a high-quality, highly diversified business like Amazon is a better buy idea than a stock like RadioShack, as long as investors are planning to hold, not gamble.
Sometimes, investors get lucky, particularly during market rallies, but we all know gambling is risky, and many times, gamblers just don't win with random pulls of those slot machines. Furthermore, deteriorating companies with brands that are falling apart are extremely difficult to renovate. You won't be able to "flip" that shack. Those who are investing in companies like RadioShack, and have actually made some money during the rally, had best take that money and run. Run fast, in fact.
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.