RadioShack Corporation's Store Closure Plans Hit a Snag

Last month, RadioShack Corporation (NYSE: RSH  ) announced plans to close up to 1,100 stores. Comparable-store sales at the struggling electronics chain fell 8.8% last year, culminating in a 19% decline during the fourth quarter. This led to a full-year adjusted loss of more than $300 million, and RadioShack's management clearly recognized the need for drastic action to stop the bleeding.

RadioShack posted a big loss in 2013.

However, RadioShack needs the approval of two major creditors to close this many stores. So far, it has not succeeded in getting the lenders on board, according to The Wall Street Journal. Unfortunately, the delay is further endangering RadioShack's long-term survival chances. Best Buy (NYSE: BBY  ) would be the biggest beneficiary if RadioShack goes under, as it would become the last national electronics retailer.

Too many stores
In previous years, RadioShack pursued growth by placing stores closer and closer together. This was a viable concept when the company was primarily selling specialized electronics items that were not widely available and therefore carried high margins.

By contrast, today RadioShack's business is heavily weighted toward selling mobile products: cellphones, tablets, and related accessories. Competition is brutal in this market. RadioShack competes with wireless carriers, online retailers, discount stores, Best Buy's big-box stores, and small-format Best Buy Mobile stores. As a result, RadioShack's gross margin has plummeted in recent years.

RSH Gross Profit Margin (TTM) Chart

RSH Gross Profit Margin (TTM). Source: YCharts.

In this context, it's no surprise that RadioShack cannot support the operating costs of its massive store base, which includes more than 4,000 company-owned locations. In many markets, the company has far more real estate than it needs. One RadioShack executive recently noted that it had eight stores within five miles of his home in Fort Worth! Closing stores is thus a no-brainer.

Problems with the lenders
That said, under its new loan and credit line agreements, RadioShack needs its lenders' consent to close more than 200 stores per year. Agreeing to the store closing plan should also be a no-brainer for the lenders.

However, some lenders are hoping to receive a portion of the cash RadioShack would free up from liquidating nearly 25% of its inventory. Others are concerned that the store closing plan doesn't go far enough. RadioShack seems to have a problem of "too many cooks in the kitchen."

The longer these negotiations take, the longer RadioShack will continue to burn cash. Last year, the company only avoided a significant use of cash through a $242 million decline in accounts receivable that reduced working capital. RadioShack won't be able to replicate that performance going forward, and the company's $554 million of liquidity won't last long if it can only close 200 stores a year.

Best Buy executives must be happy
Best Buy faces many of the same headwinds as RadioShack, but it is in a much stronger position because it has a more diversified business. Best Buy's partnerships with popular brands like Samsung also give it an edge. Most important, Best Buy is still profitable, although its earnings have been going in the wrong direction.

The Samsung Experience Shop differentiates Best Buy from other retailers. Source: Best Buy.

While Best Buy could benefit from RadioShack's store closure plan -- which would lessen competition for its own stores -- it would benefit even more if RadioShack folded entirely. With RadioShack on the ropes, it would not be surprising if Best Buy becomes more aggressive in terms of marketing and promotions in hopes of taking market share.

Foolish wrap
RadioShack is in big trouble today. Unfortunately, lenders have it over a barrel, as it cannot close very many stores without getting permission. The lenders don't have much urgency to act because their claims are "first in line" if RadioShack were to go bankrupt. Shareholders don't have that luxury.

As a result, investors should stay far away from RadioShack. The company should be able to make it through 2014, but by the middle of 2015 it could face serious liquidity issues unless the lenders relent. Best Buy has better prospects, but it is still a very risky investment candidate. Even if RadioShack disappears, it will face brutal competition from discounters and online merchants that will make earnings growth challenging.

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Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 22, 2014, at 1:51 PM, ural2012 wrote:

    I enjoyed reading your article about Radio Shack. I hold 250,000 shares of Radio Shack, which I bought when the price dropped.

    I called Radio Shack and left a message with Mr. Bishop to find out what was the current situation with the company, are going to bankruptcy? He never called back.

    In your opinion, is Radio Shack nearing its end? Who is selling the stock at such loss?

    I am watching puts, which tremendously increased the sale volume at a high price.

    I would appreciate if you could follow up on this and give me a broader opinion or you could write another article.

    Before your story was published online, the stock showed some recovery. After it went down by 10 cents. It appears you are the only source for info on Radio Shack.

    I hope your next publication on Radio Shack is more positive, it would help many small investors like me.

    Best regards,

    Jack

  • Report this Comment On April 22, 2014, at 2:48 PM, jrj90620 wrote:

    You would think,that with that with thousands of stores,stocking a minimum of items,Radio Shack would be the largest buyer of those items,getting the lowest price and could pass the savings on to the customer.That's not the case,with Radio Shack selling small parts,for more than most competitors.Crazy.Once you get a reputation for high prices,customers go elsewhere.

  • Report this Comment On April 22, 2014, at 7:58 PM, bobc74 wrote:

    Back when I was an RS store manager, I repetitively told everyone switching to a mobile devices first strategy was a bad idea. Why? Because I knew how to read my monthly P&L statement. As top line sales of "mobile" category products increased and other categories shrank, which is what we (managers, store staff) were being asked to do as per company directives, the "net profit before bonus" line on the P&L massively decreased. But did anyone listen to me? NOPE. Do I feel bad, now that I've moved on to much, much greener pastures? HE-DOUBLE HOCKEY STICKS NO! Hopefully RS dies and the executives that cooked up this ponzi scheme of fattening their paychecks while Rome burns around them can never get another job because of it. I don't think it's any coincidence that JCP has had all sorts of issues while Len Roberts sits on their board of directors.

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