Will Shuttering Stores Save RadioShack?

There are actually reasons to believe in the outdated company.

Mar 22, 2014 at 8:30AM

Many question just how in the world RadioShack (NYSE:RSHCQ) is still around. An outdated relic from a time when enormous shopping malls ruled retail, you might expect to find its iconic "R" logo encased in amber and placed in natural history museums. But like the lowly fern, RadioShack continues to live on -- although both seem constantly at risk of being trampled by larger threats.

For a chance to survive in this new age, RadioShack will close 1,100 of its more than 5,000 stores. What does this mean for the company's chances of survival?

Another gasp...
Closing stores will be a shot in the arm to RadioShack's bid to avoid bankruptcy.

First, reducing its store count by nearly 20% will reduce the company's liquidity needs, meaning it will need less cash and credit to survive into the future. As the company will have fewer lease payments, fewer paychecks to write, and fewer stores to stock with inventory, the company's $180 million in cash and equivalents and $375 million in new credit will sustain it for longer. Additionally, the company expects that after paying off any lease termination fees, the cash made from liquidating these stores will benefit its liquidity position.

Second, with fewer stores, the company will have an easier time renovating its retail experience. This hits on two of the five pillars that management noted in its turnaround strategy, namely "reinvigorating our store experience" and "revamping our product assortment." RadioShack is focusing on bringing new merchandise, such as Quirky products, Fitbit, and GoPro, and modernizing stores with interactive speaker walls, headphone testing tables, and "do it yourself" workspaces. However, it only plans to remodel roughly 100 stores this year. At that slow pace, closing stores will allow RadioShack to achieve a complete overhaul of all its locations sooner, helping repair the brand faster.

Third, closing stores will create more efficient geographical markets. As CFO John Feray said in the latest earnings conference call, "Within five miles of my home, I have eight RadioShack locations." Not only will closing some stores in oversaturated markets help profitability, but it also means fewer problems with staffing, stocking, and a perception of empty stores.

...Or a death spiral
Of course, closing stores could be the final, futile move of an already-dead company.

For one, the store closures still need to be approved by RadioShack's lenders. Its current credit agreement only allows 200 store closures per year, for a total of 600 over the life of the agreement. It hopes to obtain creditors' consent for the 1,100-shop closure plan within the next month. However, if the creditors don't approve such a plan, RadioShack could continue to be weighed down by the albatross of unprofitable stores.

Second, while focusing on its stores is important, there's little talk from RadioShack of pushing online sales. Competitor Best Buy boosted online sales 11% in its 2013 fiscal year and nearly 20% in its 2014 fiscal year. Online sales now account for about 13% of Best Buy's total revenue. RadioShack does not break out its own online revenue.

There are, of course, plenty of other arguments for RadioShack's coming demise.

Open, for now
Listening to management, you might just catch its optimism regarding future plans. We all like rooting for an underdog. But RadioShack's losses are mounting, and unless it executes its survival plan perfectly, the company will be another casualty of society's transition to online commerce.

Not all retailers are doomed
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Dan Newman owns shares of RadioShack. 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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