Should You Buy RadioShack on the Pullback?

Investors dumped shares of RadioShack on Tuesday after the retailer reported disappointing sales and said it would close more than 1,000 stores.

Mar 4, 2014 at 6:10PM

RadioShack (NYSE:RSHCQ) took a beating on Tuesday as investors pushed the stock down more than 17% to close at $2.25. The stock's sell-off comes after RadioShack reported a wider than expected sales decline for its fourth quarter, and the electronics retailer said it would shutter up as many as 1,100 U.S. stores.

With the stock spiraling out of control, some value investors are wondering whether this is an opportune entry point. However, RadioShack's turnaround story appears crippled at best. Here are a few reasons why investors should avoid buying shares of RadioShack, despite the stock's recent pullback.

Some things are better left in the '80s
RadioShack has kept square footage of its regular stores low, which has helped the chain keep overhead costs to a minimum up to this point. This, though, is no longer enough to keep the struggling retailer afloat.

There was a time when RadioShack's turnaround efforts were on track. In 2011, the company was busy forging important relationships with big-box retailers such as Target (NYSE:TGT). In fact, RadioShack operated as many as 1,400 kiosks in Target stores throughout the United States that year. That partnership helped RadioShack put its products in front of a broader audience of shoppers.

Unfortunately, the company broke up with Target last year after the two retailers failed to agree on the terms of the partnership. Worse still, RadioShack reportedly lost $38 million during the first three quarters of fiscal 2012 through its mobile tie-up with Target, according to The Wall Street Journal.

Yet even if RadioShack's prior arrangement with Target had worked out, small-format concept stores and manageable overhead would only get the company so far. One of the biggest obstacles RadioShack faces today is declining mobile sales. "As the wireless industry slows, this could be another hit to their turnaround. [RadioShack] is highly dependent on wireless, and now as that industry matures, it makes results that much more challenging," said David Strasser, an analyst at Janney Capital Markets.

Mobile sales account for half of RadioShack's total annual sales. But unlike in the 1980s, RadioShack isn't the only retailer selling mobile devices these days. In fact, RadioShack doesn't even rank among the top 10 U.S. retailers in terms of mobile device sales, according to a survey from Consumer Intelligence Research Partners. Moreover, declining wireless sales were only partially to blame for the company's weak fourth-quarter results.

A challenging retail environment
The electronics chain said lower store traffic during the all-important holiday shopping season was also responsible for the dismal numbers. For the period ended Dec. 31, RadioShack lost $1.90 per diluted share. For comparison, that means the company lost $1.27 more than it did during the same period a year ago when it posted a loss of $63.3 million, or $0.63 per share.

RadioShack's store-closure plan, too, could take its toll on the company. As Strasser mentioned in his analyst note, the cost of closing these locations will negatively affect RadioShack's liquidity. This move will cut the company's store count by 20%, leaving RadioShack with roughly 4,000 remaining retail outlets throughout the United States, 900 of which are owned by franchisees.

Radioshack

Source: The Motley Fool.

Ultimately, there are much better value plays available to investors in the consumer goods space today. RadioShack's stock is still trading above its 52-week low of $2.02, despite the recent sell-off. But given the immense odds stacked against this name, it's likely that RadioShack will eventually share Circuit City's fate.

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Tamara Rutter owns shares of Target. The Motley Fool has no position in any of the stocks mentioned. 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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