Can RadioShack Ride a New Concept to a Rebound?

RadioShack has been betting big on a new store concept to revive its flagging brand, including spending millions on an '80s-themed SuperBowl ad. Is it time to bet on a rebound?

Apr 23, 2014 at 10:30AM

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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Robert Hanley owns shares of SolarCity. The Motley Fool recommends Home Depot and SolarCity. The Motley Fool owns shares of SolarCity. 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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