Why RadioShack Can't Close Stores, Even Though It Should

RadioShack  (NYSE: RSH  ) has been in an agonizingly slow death spiral for so long that it's hard to remember the company was once a vibrant retailer.

Since Joseph Magnacca took over as CEO in February 2013, the struggling brand has shown signs of life. But whenever it appears a comeback was possible something happens to make the end of the retail chain seem inevitable. That has happened again -- not only has RadioShack lost money for the ninth straight quarter, it is being blocked from executing Magnacca's plan to close 1,100 stores.

RadioShack saw its quarterly loss grow to $98.3 million in the fourth quarter. That was to be expected as the company seeks to change its operating model and revamp its stores, but the reasons the CEO gave for the loss raises red flags about the turnaround strategy. 

Overall, our first quarter performance was challenged by an industrywide decline in consumer electronics and a soft mobility market, which affected traffic trends throughout the quarter. In particular, our mobility business was weak due to lackluster consumer interest in the current handset assortment and increased promotional activities across the industry including the wireless carriers. This resulted in disappointing sales and gross margin performance.

What's troubling about that is that the wireless business is not something the company is leaving behind, but a key pillar in its ongoing plans. If handset selection and competition from the wireless carriers can derail a quarter, then RadioShack's fate will be determined by things it does not control ... which is never good for a company.

Why can't the company close stores?

RadioShack has too many stores too close together, something Magnacca acknowledged when he announced the chain was closing 1,100 of them. That was part of an overall cost reduction strategy.

Most of those closures have been blocked by the company's lenders, which RadioShack detailed in this SEC filing. If RadioShack can't close stores then it must continue to spend money to operate those locations. That makes conserving cash in order to buy enough time to change the product mix and refocus the company much harder -- if not impossible.

Reducing costs may not  be a long-term answer or a sexy strategy, but it can work. Best Buy  (NYSE: BBY  )  faces many of the same problems and has managed to turn losses into profits even with lower sales due to cutting costs. That's not going to give the company a long-term answer to how to compete with low Internet prices, but it does buy CEO Hubert Joly more runway.

In some cases simply saving money and not going out of business is the best strategic move. If RadioShack can't do that then it may not last long enough for Magnacca to enact a turnaround.

The CEO insists things are going just fine

While not being able to close those stores deals a blow to Magnacca's plan, he said in a press release that everything is right on track. 

Even in this environment, we are making progress on our turnaround strategy. We are building the pipeline of new products that will bring differentiation and newness to our stores in the form of high-margin private brand and exclusive items, including those from new partnerships like Quirky and PCH. Our concept stores continue to drive strong sales growth, and we have begun to execute our 100-store remodel program to scale the successful components of our concept stores across our network.

All of that is true -- and the PCH deal, which creates a pipeline for start-ups to put innovative products into RadioShack stores, is especially exciting -- but closing stores was clearly a key part of the strategy when Magnacca announced it in March after conducting an extensive review of the chain's physical locations.

"The result of that review is our plan to close up to 1,100 underperforming stores," he said at the time. "We will continue to have a strong, unmatched presence across the U.S. with over 4,000 stores including over 900 dealer franchise locations."

In blocking the store closures the company's lender may well be pushing it toward liquidation. 

"RadioShack has everything moving in the wrong direction: Comps are down double digit, gross margins are declining, and operating expenses as a percentage of sales are going up. This is a triple whammy, and it's pushing them closer to extinction," Michael Pachter, an analyst at Wedbush Securities, told USA Today 

The end is near

Magnacca has put up a valiant struggle but if the company's lenders are making moves that affect the chain's ability to conserve cash, then righting the ship might not be possible.

Few businesses have ever been able to reverse the type of downward trajectory RadioShack has been experiencing. Even if the store closures had gone through there is no guarantee that the CEO's turnaround plan would work.

The PCH deal seems intriguing but it's a complete wild card as to revenue potential. It could give the chain early distribution of the next big thing or it could leave it with a rack of cool gizmos nobody buys. Similarly the company has been advertising its "Fix It Here" program that in some markets offers same-day repairs on broken electronics, but it has yet to be seen if that effort can bring people back to RadioShack.

No matter what mix of electronic items, service, and technical know-how RadioShack peddles, it's likely the need for small, local electronics stores is over. Nearly everything RadioShack sells can be purchased cheaper online (usually from Amazon  (NASDAQ: AMZN  ) ). Everything else the chain might offer -- be it service or mobile phones -- can be had from multiple competitors in every market RadioShack serves.

If Magnacca can find a way to make money in the short term, perhaps he can -- like his counterpart at Best Buy -- use the time that affords him to create a model that works. Without that time he is likely to fail and America's malls and strip malls are likely to have 4,000 or so tiny vacant storefronts that once housed RadioShacks. 

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Read/Post Comments (2) | Recommend This Article (1)

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  • Report this Comment On June 14, 2014, at 1:17 AM, Vanmusicblues wrote:

    3 points, the losses were 2x analysts estimates are were not "expected", at these levels. remodeling a few stores running a super bowl ad implying a big change was not a good plan. the lenders doesn't want this guy bleed them as long as possible paying himself 8 million a year.

  • Report this Comment On June 19, 2014, at 1:33 PM, KMorrison wrote:

    I think they have an image problem as well, it's seems to be dated and overall product selections should completely change and update to a one stop shop for various popular categories. The days of having time to go to one store for only tech is WAY over. They could make this change pretty quickly by expanding and updating the on line offerings with new departments all with special buys within each to attract a new customer as well as surprising the current loyal customers they do have still.

    I would suggest changing the name as soon as the store closes are completed and update to reflect the new changes....just sayin, obviously my opinion only.......

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