RadioShack Shares Are No Cut-Price Bargain

U.S. stocks were unchanged on Tuesday, as the benchmark S&P 500 was down by just 0.02% and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose by 0.02%. The technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) gained 0.04%.

One company that can only wish for a flat performance today is struggling electronics retailer RadioShack (NYSE: RSH  ) , which reported dismal results for its fiscal first quarter, which sent the shares down 10.4%. While bottom-fishers and short-term traders may see opportunity in the share price drop (indeed, the shares are up 2% in after-hours trading), I would advise investors to give this stock a wide berth.

RadioShack's numbers for its quarter ended May 3 tell a tale of decline and despair. The adjusted loss from continuing operations of $0.98 missed Wall Street's expectations by a wide margin and is, in fact, below the lowest analyst estimate. Revenues of $737 million fell 13% year on year, also missing the consensus estimate, but in line with the 14% drop in comparable-store sales.

While the company has refinanced its long-term debt maturities out until 2018, there is growing concern -- legitimately so -- about the company's liquidity position. RadioShack says it has sufficient cash to last 12 months, but that's based on the assumptions that it can boost sales in certain areas and raise margins. Neither of those assumptions looks self-evident -- or even likely, in my opinion.

In explaining the disappointing sales and gross margin performance in the quarter, CEO Joseph Magnacca told investors and analysts that "our mobility business was weak" because of "lackluster consumer interest in the current handset assortment and increased promotional activities across the industry including the wireless carriers." However, the company's fundamental problem isn't cyclical -- it's largely the result of having no competitive advantage in a market that is undergoing a secular shift in consumer buying habits.

In 2012, Alan Wurtzel, a former chief executive officer of electronics retailer Circuit City and the son of the company founder, wrote a book, Good to Great to Gone, to understand why the company was forced to declare bankruptcy in 2008 before being liquidated the following year. Wurtzel concluded that Circuit City management had a turnaround plan for the company, but they were unable to implement it in the face of pressure from Wall Street, as investments that might have secured the company's survival would have had an adverse short-term effect on the stock price.

His conclusion, as told to The Wall Street Journal in 2012: "I don't think you can turn around a failing company in the full glare of publicity." His recommendation is, therefore, that ailing businesses go private before attempting a turnaround.

In the case of RadioShack, the company has already faced resistance from lenders to its plan to shutter 1,100 stores, or roughly a quarter of its 4,250 U.S. store count. Without their agreement, RadioShack can close only 200 stores, an initiative the company is proceeding with this year. That is likely to be too little, too late. The U.S. consumer simply doesn't need a RadioShack at its current size -- if he or she needs it at all.

In Circuit City's case, no margin of safety was enough to protect equity investors. Ask yourself: What is the difference between Circuit City and RadioShack? I think it's likely that the latter will ultimately share a similar fate to the former -- chapter 11 bankruptcy at least, even if it is somehow able to emerge as a slimmed-down version of itself. This is no time to go shopping for RadioShack shares.

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