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Can RadioShack Ride a New Concept to a Rebound?

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Technology and communications product reseller RadioShack (NYSE: RSHCQ  ) has been a wellspring of bad news lately, with a shrinking customer base and declining sales. The company's latest quarter was more of the same; RadioShack reported a double-digit decline in comparable-store sales and a large operating loss, leading to a sharp drop in its stock price. In response, management has embarked on a store-closure spree and is aggressively marketing a new store concept that is focused on interactive displays and higher-touch customer service. So, is it time to bet on this fallen star?

What's the value?
Despite reducing its overall footprint over the past few years, RadioShack still has a formidable national presence, with more than 4,000 stores across the U.S., complemented by another 1,000 affiliated stores in international markets. Its compact store size, combined with its significant overall buying power, should theoretically power a profitable operating model for the company. Unfortunately, RadioShack has been hurt by the rise of store networks owned by its equipment manufacturing and telecom partners, which has siphoned away customer market share and lowered its per-store productivity.

RadioShack's difficult situation is evident from its poor financial results, highlighted by a 10.4% top-line decline in its latest fiscal year that was negatively affected by store closures and a big drop in comparable-store sales.The company's big bet on wireless phones, approximately half of its total sales, has not panned out well due partially to a consumer shift toward more expensive smartphone models that have lower selling margins. 

In addition, the aforementioned competitive threats from RadioShack's business partners have raised the company's marketing costs, creating a perfect storm that led to a large operating loss for the period.

Looking into the crystal ball
In response to its weakening financial position, RadioShack's management has had no choice but to take its medicine. It recently decided to close roughly 1,100 stores, nearly one-quarter of its domestic base. The company has also championed its new concept store model, which allows customers to interact more with products prior to making a purchasing decision and attempts to forge more of an advisory relationship between sales staff and customers. 

The new concept may staunch the customer volume losses. But it would seem to do little to change the declining trajectory of RadioShack's merchandise margin, which has been hurt by consumers' desire for pricier product lines that are less profitable to sell.

A better way to go
Given RadioShack's sizable debt load and its uncertain path to profitability, investors would likely find a better risk/reward ratio at competitor Best Buy (NYSE: BBY  ) . After going through its own operating struggles in 2012, Best Buy seems to be on the right track, thanks to its Renew Blue turnaround plan that has generated more than $700 million in cost savings to date.

While Best Buy's total sales dropped in its latest fiscal year, down 3.4%, its product diversity allowed it to turn in a significantly better performance than RadioShack, aided by a strong double-digit gain for its appliance category. Best Buy is also finding growth in the services arena through its Geek Squad unit, a high-margin business that allows the company to differentiate itself from its purely retail competitors.

The net result for Best Buy has been a continuation of free cash flow despite the obviously difficult current sales environment, which is providing funds for new product development. This includes a new in-store partnership with SolarCity (NASDAQ: SCTY  ) , the largest domestic installer of solar-energy systems. 

SolarCity has been on a tear lately, as evidenced by a 78% increase in system deployments in FY 2013, thanks to falling unit costs and its ability to increase its operating footprint across the country through partnerships with major retailers, like Home Depot and Best Buy. With kiosks in only 60 Best Buy stores as of December, the addition of SolarCity kiosks in a larger swath of Best Buy's store base would be a win-win for both companies and likely serves as a further differentiator for Best Buy as it seeks to stand out in the retail marketplace.

The bottom line
RadioShack surely looks enticing after having its market valuation cut in half over the past 12 months. However, there is a good reason for the malaise, as Mr. Market seems to doubt the company's ability to pull itself out from its current death spiral. While management may be on the right path with its new concept, investors would be wise to avoid the stock, much as they seem to be avoiding the company's stores.

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Read/Post Comments (9) | Recommend This Article (1)

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 24, 2014, at 1:18 PM, jrj90620 wrote:

    Agree with you.Best Buy has a much better chance of recovering than Radio Shack.

  • Report this Comment On May 05, 2014, at 8:01 PM, MightyMinnow wrote:

    This is the 80's calling. I want my life back. I want to pay my phone (all) bills in cash. I'm glad Radio Shack is going to start accepting cash payments and is paying them electronically for its walk in, cash paying patrons. The providers abandon us. Its going to pick up a lot of traffic. Some people will want to buy their phone where they pay their bill.

  • Report this Comment On May 05, 2014, at 8:06 PM, MightyMinnow wrote:

    This is the 80's calling. Its starting to look a lot like 1984 around here. I'm glad Radio Shack is going to start installing self monitoring security systems. I don't want the BK killers or the NSA to have access to my monitor.

  • Report this Comment On May 05, 2014, at 8:21 PM, MightyMinnow wrote:

    This is the 80's calling. When I went to school the boys didn't even take typing. I'm glad that Radio Shack is going to start having regular evening classes to teach its customers how to use a computer, smart phone, or I-pad. Grandma will get used to not having to fight the crowds, when she learns how to (and not to) shop online.

  • Report this Comment On May 05, 2014, at 9:16 PM, MightyMinnow wrote:

    A walk in pay pal system would be nice too. You load your on-line debit card with cash (at Radio Shack), when you go to pay your bills, and use it when you need it. When its empty it don't work.

  • Report this Comment On May 06, 2014, at 1:58 PM, PopeJeffMo wrote:

    FYI, "staunch" is an adjective. I'm guessing the author means "stanch." Good article, and thanks for the analysis.

  • Report this Comment On May 08, 2014, at 8:51 AM, MightyMinnow wrote:

    A nice feature the stores could have is land line phones, for its bill paying walk-ins. Nobody wants to use up cell phone minutes calling the phone companies 800 number, to correct an error in the companies favor. Plus Radio Shack would have an electronic receipt even if the customer lost his.

  • Report this Comment On May 08, 2014, at 9:09 AM, MightyMinnow wrote:

    Including all utilities/mortgage/ect. bill paying (along with targeted phone bills) would eliminate the need for advertising. Radio shack would be gladly put on the pay station list by the utilities. RSH could use a bundled bill fee and have a $5.00 a pop line at the door all day. The competition is weak.

  • Report this Comment On May 08, 2014, at 2:44 PM, MightyMinnow wrote:

    I might smell like a bull but I don't own RSH (except my caps). I bid $1.21 on 2000 shares. I want 2000 shares and I have $2500 (The broker was a friend of my dads). I'd be happy to see these changes and miss the boat.

    It was fun riding the run but the world is geo-politically on the rocks and I'm betting the Ukraine sanction (^^^^^ contest) is going to pull American earnings down with it 10 % or so.

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