Will These 2 Companies Survive 2014?

Sear's Holdings and RadioShack have fallen behind their competition. Is it too late for them to catch up? Or will 2014 be turnaround years for both?

Jan 6, 2014 at 2:50PM

Lately, it seems that the market is achieving a new record high every day. However, it's easy to forget that there is no such thing as a universally good market. That is, there will always be companies that are struggling and/or trading at a steep discount.

Two businesses fitting that description are RadioShack (NYSE:RSHCQ) and Sears Holdings (NASDAQ:SHLD). Let's take a look at both companies to determine if either is worth taking a chance on.

Can RadioShack adapt to the new retail environment?
At $2.67 per share as of this writing, RadioShack has lost almost 75% of its value over the past five years. RadioShack has a market capitalization of around $260 million, which means it is worth just over $46,000 for each of its 5,600 locations, one of the lowest per-location valuations of any retailer. 

There are no other large retail chains that are direct competitors to RadioShack, but Best Buy(NYSE:BBY) is pretty close.  Even though Best Buy stores are much larger and carry a much wider range of products, both companies compete in such key areas as mobile phones, tablets, and other consumer electronics. Best Buy's current market cap is just over $14 billion, meaning that each Best Buy store accounts for around $7 million in market cap, or 152 times that of each RadioShack.  Each Best Buy is about 15 times the size of the average RadioShack (38,500 vs. 2,500 square feet), so its easy to see how disproportionately low RadioShack's valuation is.

RadioShack has been hemorrhaging money over the past couple of years, having lost $1.39 per share in 2012 and expecting losses of around $2.08 this year. In other words, RadioShack's combined losses over the past two years are actually more than the current share price! The consensus calls for losses of more than $1 per share for the foreseeable future, which raises the question: Will it turn around?

In order to survive and be viable, RadioShack needs to be able to profitably compete with large retailers with much better economies of scale, such as Amazon.com or Best Buy. The other option is to offer a truly unique product (or products) that consumers simply can't get anywhere else. It's certainly possible, but RadioShack has a long uphill battle ahead.

How is Sears still in business?
In my opinion, Sears is one of the great mysteries of the stock market. I really can't think of any good reason that Sears is still in business. Sears has been losing money at an alarming rate for three years now, and there is no end in sight. The company has tried many strategies over the past few years, including a renewed emphasis on its rewards program, new brands, new partnerships, and a stronger focus on the online side of the business.

Still, Sears has found little success and the company's losses continue to mount. In fact, the current fiscal year (2014) is expected to be the company's worst yet, with a projected loss of $6.20 per share. For its 2016 fiscal year, analysts are projecting losses as much as $8.71 per share. Sears is also very cheaply valued, currently trading at just under $2 million per store, terrible considering the sheer size of the average Sears or Kmart, but still a pretty generous valuation for a company that is losing so much money with no end in sight. 

For comparitive purposes, consider that each of Macy's (NYSE:M) stores contribute over $23 million in market cap to the company.  Macy's simply has been a better-run business, and the company has been successful as using the Internet as a complement to its in-store business.

Sears has some of the same hurdles facing it as RadioShack does, including staying competitive with larger, more efficient competitors. However, it's not as if Sears doesn't have the sales volume. I would think a company with $40 billion in annual sales could figure out how to turn a profit.

Is either company worth the gamble?
The short answer is "no," but shareholders of both companies could be very handsomely rewarded if a turnaround were to take place. Of the two, I think RadioShack is the more viable candidate for a turnaround, due to its much lower overhead (smaller stores) and its rather successful partnerships with mobile phone companies.

In my opinion, RadioShack is in a much better position to get customers into its stores, while Sears may have fallen too far behind to recover. Whatever happens, it will be interesting to watch, but I'll be doing it from the sidelines.

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Fool contributor Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and GameStop. 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.

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