Will Best Buy Rise From RadioShack's Ashes?

RadioShack's impending bankruptcy might not hurt Best Buy but rather help it.

Jun 18, 2014 at 9:30AM

RadioShack (NYSE:RSHCQ) might very well be the next Circuit City, as limited liquidity and mounting costs usually have one outcome, and that's bankruptcy. While RadioShack might be next in the bankruptcy line, there are a slew of other brick-and-mortar electronic retailers like hhgregg (NYSE:HGG) that could eventually join the list. However, could this inevitably be a blessing in disguise for Best Buy (NYSE:BBY) shareholders?

The end of the road?
Many have speculated that If and when RadioShack goes under, it will be bad news for large brick-and-mortar electronic retailers. Because after all, it would be the second multibillion-dollar retailer to crumble in the last six years.

Albeit, Circuit City's demise occurred in late 2008, when the economy began to worsen. By all measures, RadioShack's problems have occurred during a period of economic recovery, further adding to the notion that its business is beyond saving.

In its last quarter, comparable-store sales fell 14%, and its gross margin declined 370 basis points to just 36.5%. These rapid margin and comparable sales declines have occurred despite an aggressive store closing plan, including another 200 locations this year.

The rating agency Fitch recently downgraded its default rating to CC, approaching junk rating. Fitch added that RadioShack does not have material sources of liquidity beyond its revolver. Therefore, all signs indicate that the company is approaching the end of the road.

What are the implications?
If a bankruptcy occurs, don't let RadioShack's $130 million market capitalization fool you into believing it's insignificant, because this is a company with $3.4 billion in revenue during the last 12 months. Therefore, those earnings, and the consumers who shop at RadioShack, will have to go elsewhere.

Best Buy could see a nice boost from the bankruptcy of RadioShack, as it's the most similar large store in the U.S. Temporarily, hhgregg could also see a boost resulting from a RadioShack bankruptcy, as it has a large appliances business.

However, hhgregg isn't in much better shape than RadioShack; its comparable sales decreased 9.9% in its last quarter along with a 160-basis-point decrease to gross margin at 28.3%, worse than RadioShack. With that said, the one thing in hhgregg's favor is a relatively strong balance sheet. It has just $233 million in current liabilities; RadioShack has $455 million, meaning its demise might take longer.

In the end, Best Buy might eventually gain from the bankruptcy of not only RadioShack but also the $2.34 billion a year hhgregg.

Why will Best Buy be the one to gain?
When a large brick-and-mortar electronics retailer goes out of business, or is fundamentally challenged, investors automatically assume it has been absorbed by one of the growing e-commerce companies. However, RadioShack is a very unique company in that its e-commerce business is essentially insignificant.

Specifically, a large percentage of its business involves items like batteries for watches and small appliances, extension cords, fuses, wires, chargers, etc. These are things that consumers typically need in a hurry or in the event of an emergency and can't wait two to three days for shipping. This is a business that Best Buy would likely absorb with ease, and then half of RadioShack's business is created from mobile, which includes phones and accessories.

As we know, mobile is a huge business for Best Buy and is growing. Therefore, if you combine the revenue from RadioShack's mobile business and its need-it-now appliances, this is one brick-and-mortar electronics retailer that e-commerce juggernauts may not absorb.

Foolish thoughts
Best Buy is the one brick-and-mortar electronics company that has seemingly figured out how to combat the rise of e-commerce. It had a rough start, but today the company is leaner, with $860 million in cost reductions since last year, and it has a growing e-commerce channel along with a rising operating margin.

The one area that remains a problem is revenue growth. But as more of these RadioShack-like companies falter, Best Buy appears to be a company that could grow in the years ahead, thus driving stock gains higher.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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