Everyone loves a good turnaround story, but troubled consumer electronics retailer RadioShack (RSHCQ) doesn't have one. The stock has been rapidly declining, falling from $4 per share in October to around $1 per share today, a price which values the company with over $3 billion in annual sales at less than $100 million. Big-box competitor Best Buy (BBY -2.19%) is gaining market share in a weak consumer electronics market, and RadioShack's net loss in 2013 was quadruple its current market capitalization. I previously wrote that shares of RadioShack were headed toward $0 per share, and while some arguments have popped up claiming that RadioShack isn't as bad as people think, buying shares is pure speculation at this point, and that's not a very Foolish thing to do.
Source: Flickr/Nicholas Eckhart
Bonds paint a scary picture
RadioShack has about $600 million in debt, and roughly half of this from a bond issue that matures in 2019. Over the past year, the price of this bond has fallen precipitously, hitting a low of $35 earlier in June, down from around $75 one year ago. The current yield to maturity, which is the total annualized return an investor expects if the principal is repaid at maturity, is a staggering 30%.
What this means is that bond investors are not very confident RadioShack will survive until 2019. For the sake of comparison, J.C. Penney bonds carry a yield to maturity of less than 10% at the highest, and that retailer is still far from being out of the woods. RadioShack's bond prices should act as a big red flag for anyone thinking about gambling on a turnaround.
The book value argument is bunk
RadioShack is trading close to its book value, and with no goodwill or intangibles on the balance sheet, the argument that a RadioShack bankruptcy may not wipe out equity investors doesn't seem outrageous. Remember, in the event of a bankruptcy and liquidation, common shareholders are only paid after all debts have been settled.
There are two problems with this argument, however. First, RadioShack's book value has been collapsing:
RSH Book Value (Quarterly) data by YCharts
At the end of the fourth quarter, RadioShack had a book value of over $200 million, twice the current market capitalization. But this fell to $72 million after the first quarter, and at the rate that the company is burning cash, it won't be long until this number turns negative as RadioShack continues to tap into its available credit. Every day that RadioShack continues to operate, the book value declines.
The second problem with this argument is that most of the company's assets are tied up in inventory. RadioShack had almost $800 million in inventory on its balance sheet at the end of the fourth quarter, and this would likely be sold at fire sale prices in the event of bankruptcy. This means that the liquidation value, which is more relevant than the book value here, is almost certainly not enough to cover the company's debt load. Equity investors are going to be wiped out completely should RadioShack go bankrupt.
Too little, too late
RadioShack is taking steps to draw people back into its stores, but these actions are coming far too late to save the company. A partnership with PCH International, a start-up accelerator, will put a small area within RadioShack's stores dedicated to selling hardware products from start-up companies. While this is a good idea, and it harkens back to RadioShack's roots as a store for hobbyists, it's not going to move the needle.
If RadioShack had taken steps like this a few years ago, it may have helped the company remain relevant. But today, the brand is worth almost nothing. The consumer electronics industry is currently weak, with NPD expecting the industry to decline during the second quarter, and Best Buy is actively winning market share. Best Buy is winning the battle for store traffic, with its embrace of being a "showroom" helping to lead to a comparable store sales decline of just 1.3% during the most recent quarter, lower than the decline of the industry as a whole. Compared to RadioShack's 14% decline in comparable store sales, it's clear which retailer is better navigating the storm.
The bottom line
At this point, RadioShack doesn't have enough time to win back customers. Small steps like the PCH partnership sound great, but they do nothing to reduce the enormous losses that the company is racking up. Bargain hunters should look elsewhere, because RadioShack is less than worthless, and investors gambling on a turnaround are more than likely to be completely wiped out.
