Is RadioShack Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does RadioShack (RSHCQ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell RadioShack's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at RadioShack's key statistics:

RSH Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q3 2010.

RSH Return on Equity (TTM) data by YCharts

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
Things don't look good for RadioShack in its second assessment, as the electronics retailer has lost one of the two passing grades it earned last year, and its lone passing grade for 2013 was awarded more on a technicality than because of genuine improvement. However, because of the unusual situation that's resulted from a dividend suspension last year, RadioShack earns only one of eight passing grades, rather than one of nine. RadioShack's new CEO Joseph Magnacca may be eyeing a major makeover, but the stock has continued to slide through 2013. Is there any hope left for RadioShack?

RadioShack recently saw its shares plunge 25% lower after the company reported a double-digit drop in sales and a miserable 8.4% decline in comparable-store sales for the third quarter. Fool contributor Adam Weinberg notes that the drop in revenue partly stemmed from cutting the number of SKUs (distinct products) from 4,500 to 3,500 at RadioShack stores, but RadioShack's new focus on smartphones and tablets has also faced fierce competition from consumer-electronics superstore Best Buy (BBY 0.20%) and from mobile manufacturers themselves. Apple currently operates more than 250 Stores in the U.S., and Best Buy has developed a sort of anti-Apple Samsung Experience Shop, which it has already rolled out in more than 1,400 of its stores. The rise of branded mobile outlets could crowd RadioShack out of this market if it fails to offer any differentiating factors to fickle consumers.

Fool contributor Caroline Bennett notes that RadioShack has much riding on CEO Joseph Magnacca's turnaround strategy, which focuses on remerchandising, easier-to-navigate "concept" stores, and a "contemporizing" (modernizing) of stores. Magnacca has stated that remodeled stores have started to see double-digit same-store-sales growth, and he plans to launch around 100 concept and brand statement stores. RadioShack has also recently secured $835 million in debt financing, which will provide sufficient liquidity for its turnaround efforts at least through 2016. In addition, the company ought to benefit from Amazon.com's (AMZN -2.56%) decision to raise its Free Super Saver Shipping minimum order amount from $25 to $35, as RadioShack has a number of items in the sub-$35 pricing sweet spot.

On the other hand, Amazon has also been diving deep into consumer electronics, which has intensified the battle among RadioShack and its bricks-and-mortar peers. Longtime Fool contributor Rick Munarriz notes that customers are likely to shop from Amazon.com in the forthcoming holiday season, as they can buy virtually any mobile device or other electronics, often at a lower price than is found on RadioShack.com or in RadioShack stores. Furthermore, Sam's Club and Target both discontinued their kiosk agreements with RadioShack, which hinders the company's visibility and thus hampers its turnaround plan.

Putting the pieces together
Today, RadioShack has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.