While RadioShack (NYSE: RSH ) has been struggling for the last few years, the most recent holiday season was a complete disaster for the company. Sales fell off a cliff, with same-store sales declining by a monstrous 19% year over year. And the company posted a full-year loss of more than $400 million, about twice its current market capitalization.
With the planned closure of more than 1,000 stores, representing around 20% of the company's total store count, cost cutting should help slow the bleeding. But with shopping increasingly shifting to Amazon.com (NASDAQ: AMZN ) and other online retailers, along with the aggressive price-matching policy of rival Best Buy (NYSE: BBY ) , can RadioShack be saved? Or is the company's 90-year history about to come to an end?
How much time does RadioShack have?
Before considering whether or not RadioShack's plan to modernize its remaining stores will succeed, it's important to understand exactly how long the company has before liquidity becomes an issue. At the end of the fourth quarter, RadioShack had about $180 million in cash, well below the $535 million it had at the end of the fourth quarter of 2012. There's $613 million of long-term debt, but the good news is that basically all of this debt isn't set to mature until 2019.
While the company's $400 million loss during 2013 suggests that the money will run out soon, free cash flow for the year was only -$7 million, reflecting a large reduction of inventory and other working capital items. The company may be able to fund itself from working capital for a while, with inventory levels still extremely high; but without taking on more debt, RadioShack probably has a year at most to radically reduce its losses before the situation becomes unsalvageable.
Costs are out of control
While revenue declined by more than 10% in 2013, selling, general, and administrative costs were basically flat. The planned store closings will certainly reduce this number going forward, but it seems that RadioShack has made no attempt thus far to reduce costs amid falling sales. In 2012, SG&A costs represented 37% of revenue. In 2013, this number jumped to 41%.
Comparing these numbers to those of Best Buy, it becomes clear that RadioShack's costs have gotten out of control. In 2012, SG&A represented 20.4% of Best Buy's revenue. This number fell to 19.8% in 2013, the result of a cost-cutting program that largely made up for Best Buy's declining revenue.
Now, I'd expect RadioShack, with a large number of smaller-format stores, to have higher costs than Best Buy. But RadioShack spends more than twice as much relative to revenue than Best Buy running its stores. Closing unprofitable stores will help bring this number down, but there seems to be a structural problem at RadioShack. While Best Buy was cutting out layers of management and making its supply chain more efficient, RadioShack sat on its hands and did nothing. An unsustainable cost structure is the result.
What purpose does RadioShack serve?
Beyond the numbers, the biggest issue for RadioShack is that it no longer provides value to the consumer. Mobile phones have been a big focus over the past few years. But competition in that area is fierce, and turning a meaningful profit is difficult. Best Buy has become a major seller of smartphones, now selling around 12% of all smartphones in the United States. And along with Apple stores and the stores run by carriers like Verizon, consumers have plenty of options. With nothing differentiating RadioShack except its smaller selection of products, the company's strategy has largely failed.
Online retailers like Amazon also aren't making things any easier for RadioShack. While Best Buy has focused on growing its e-commerce channel, with online sales jumping by more than 25% in 2013, I failed to find a single mention of online sales in RadioShack's earnings release or on its conference call. Without Internet sales to make up for falling brick-and-mortar sales, RadioShack is in a difficult position.
It also doesn't help that RadioShack's prices on many items are well above the competition. The cheapest 6 foot HDMI cable on RadioShack's website goes for $8.99; Amazon sells a comparable cable for $5.79, while other merchants selling on Amazon.com offer an even better price. Even Best Buy sells one for $5.49; and with more than 1,000 Best Buy stores nationwide, it makes little sense to visit a RadioShack instead.
RadioShack's attempts to modernize its stores are probably too little too late, as Best Buy already serves the purpose of being a consumer-electronics showroom. Can a RadioShack with a far smaller number of stores survive? Maybe. But the company doesn't have much time to get there.
The bottom line
RadioShack is in serious trouble, with losses accelerating and a year at most to turn things around. Closing 20% of its stores is a good step to take, as costs have gotten out of control, but regaining relevance among consumers is an entirely different problem. I think that it's more likely than not that, five years from now, RadioShack will no longer exist.
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