Is There Big Value in RadioShack?

Source: Wikimedia Commons

Sometimes the best investment is an investment in a business that is unloved. Perhaps no company is more unloved right now than RadioShack (NYSE: RSH  ) . After news broke that the company is engaged in heated debates with its lenders on whether or not to close up to 1,100 of its 4,300 stores, shares of the electronics retailer plummeted nearly 17% to close at $1.41.

However, in spite of all this bad press, is RadioShack an attractive opportunity for the Foolish investor? Or is it, like Best Buy (NYSE: BBY  ) , in more trouble than investors might think?

RadioShack is in trouble!
Over the past three years, times have been hard for RadioShack. During that time frame, the company's revenue fell a jaw-dropping 22% from $4.4 billion to $3.4 billion. This decrease in revenue was due, in part, to the closing of 1,790 RadioShack locations, most of which were kiosks. On top of store closings, management reported continually worsening comparable-store sales declines.

RSH Revenue (Annual) Chart

RadioShack revenue (annual) data by YCharts

The revenue decline exceeded the fall experienced by Best Buy over that same time frame. Between 2011 and 2013, the tech retailer saw its revenue fall 16% from $50.7 billion to $42.4 billion. According to Best Buy's most recent annual report, the company saw a rise in store count from 1,915 to 1,968 over this period but was negatively affected by a decline in comparable-store sales.

In terms of revenue, RadioShack did slightly worse than its peer, but the company's bottom line was terrible when placed next to Best Buy. Between 2011 and 2013, RadioShack's net income of $72.2 million turned into a loss of $400.2 million. In addition to being hit by falling sales, the business reported that its cost structure rose in relation to sales.

Over the three-year time frame, RadioShack's cost of goods sold rose from 58.6% of sales to 65.9%, while its selling, general, and administrative expenses jumped from 36% of sales to 41%. Both of these metrics fell because management was unable to cut costs at the rate that customers were leaving its stores.

RSH Net Income (Annual) Chart

RadioShack net income (annual) data by YCharts

In contrast, Best Buy did reasonably well. Over this time horizon, the company's bottom line rose from a loss of $1.2 billion to a gain of $532 million. Even though sales fell significantly, the business saw its costs fall a great deal. However, the rise in profits came from smaller impairment charges and the occurrence of a minority interest expense reported in 2011.

Excluding the difference in impairment charges and adding back in the minority interest expense, we would have seen Best Buy's net income actually fall 27% from $731.1 million to $532 million. This drop took place primarily due to an increase in the company's cost of goods sold, which rose from 75.2% of sales to 77.2%.

Source: RadioShack

Despite its troubles, Radio, Shack looks cheap!
Even though RadioShack is a troubled company, it's hard to deny that it offers investors some appeal. Based on its closing price on April 17 and a book value of $2.06 per share, the company is currently trading at 69% of book value. This might make for an interesting value play for the Foolish investor because of the margin of safety that exists, but there's a catch: The assumption that book value equates to liquidation value could prove faulty.

You see, with inventory being valued by management at $8 per share, there's plenty of downside should the company have to book asset impairments. Even after adding in the current market value of its treasury stock, the company's equity would be wiped out if its inventory was reduced (by means of an impairment) by about a third. This type of scenario could leave RadioShack investors in deep trouble.

Foolish takeaway
As we can see, RadioShack is an interesting prospect because of its asset value. But any decision to buy the business based solely on this factor would expose investors to a great deal of risk. Ultimately, the company will live or die by its ability to generate profits from its revenue, which likely implies that its effort to close 1,100 locations is vital to its future.

Right now, management has the authority to close only 200 locations without lender approval; so the long-term investor should keep a close eye on the progress of the company's negotiations and invest only in the event that lender approval seems likely. If this does go through, the Foolish investor will probably see a decent chance of making profits if management can turn the business around; but any failure to receive support from its key parties could send the company, and its shares, spiraling downward.

Boost your 2014 returns with The Motley Fool's top stock
Right now, RadioShack looks dubious at best. But if management can close its stores and improve profitability, then the business could be a prime candidate for the Foolish investor.  However, is RadioShack the best prospect for investors, or is there something better out there?

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