Troubled electronics retailer RadioShack (NYSE: RSH ) can't seem to catch a break. After years of unsustainable losses, RadioShack announced a massive round of store closings earlier this year, a necessary step in the company's turnaround efforts. However, RadioShack's agreements with its creditors forbade such a move without approval, and the company was recently forced to renege on its plans to close over 1,000 stores, which represent around 20% of the total store base. Instead, RadioShack will close far fewer stores, as its creditors will allow a maximum of 200 store closings per year, and the company will have to attempt to cut costs in other ways.
Without the ability to close underperforming stores, bankruptcy now seems like an inevitability. In markets with competitors like Best Buy (NYSE: BBY ) and other big-box stores, there's simply no reason for consumers to visit RadioShack stores. With the company forced to continue to operate these stores at a loss, bankruptcy may be the only option.
RadioShack is falling apart
At the end of 2012, RadioShack was still sitting on more than $500 million in cash, and while the company lost money that year, the situation didn't look nearly as dire as it does today. At the end of 2013, RadioShack had just $180 million in cash and its total debt sat at $613 million. The company's financial situation has deteriorated significantly over the past five years:
While much of the debt doesn't mature until 2019, if the current rate of cash burn continues then the company soon won't be able to afford the interest payments. RadioShack recorded a negative free cash flow of $156 million in the fourth quarter of 2013, the holiday quarter that is supposed to be a retailer's strongest. With $52 million in annual interest payments and only $180 million in cash remaining, the situation appears dire. The company does have an available credit line, but financing interest payments with more debt will only delay the inevitable.
The biggest problem is that RadioShack simply isn't selling enough stuff. The number of annual inventory turns, or the number of times per year that the company sells through its entire inventory, has been constantly declining over the past five years:
This is the reason why RadioShack desperately needs to close stores. Many locations simply aren't profitable at this level of inventory turnover, and the company has waited far too long to address the problem.
A matter of when, not if
RadioShack has run out of options. Barring a deal with its creditors, the only way that the company can close enough stores and have a chance to return to profitability is through bankruptcy. The stock may look attractive to some as a turnaround play based on an absurdly low price-to-sales ratio, but the stock price is likely on its way to zero.
RadioShack simply isn't competitive against online retailers or stores like Best Buy, and its new turnaround strategy is unlikely to work. RadioShack is trying to revitalize its image in the minds of consumers as a "neighborhood technology playground." This sounds an awful lot like the plan that Best Buy has been executing for the past year and a half, and although the results have been rocky, Best Buy has done a far better job remaining relevant than RadioShack.
Best Buy has been calling itself the "Ultimate Showroom," embracing the concept of showrooming and allowing consumers to try out and experience its full range of electronics. The store-within-a-store concepts from Samsung, Microsoft, Apple, and now Sony have been going well, at least based on the recent deals with Samsung to add 500 additional mini-stores and with Sony to open 350 mini-stores within Best Buy locations. These companies clearly see value in this strategy, and that's good news for Best Buy.
RadioShack also appears to be attempting to embrace being a showroom, but there are a few problems with this. First, Best Buy has a far broader selection of products than RadioShack, and in markets where both stores exist, the convenience of a shorter drive to RadioShack is likely outweighed by the lack of selection. Second, RadioShack's e-commerce operation is almost non-existent. While Best Buy has been investing heavily in e-commerce, growing its online sales by over 25% during the holiday season, RadioShack doesn't even mention online sales in its quarterly reports. Being a showroom without a strong e-commerce operation doesn't make much sense.
The bottom line
RadioShack's new strategy is flawed, and the company is very rapidly running out of time and money. Without the ability to close a large number of underperforming stores, bankruptcy appears to be the only option. It's possible that a post-bankruptcy RadioShack that focuses on less-populated markets without much big-box competition could be successful, but RadioShack is not a turnaround play. Investors should steer clear.
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