How RadioShack Made Billions Disappear

Share buybacks have put the retailer in a bigger hole than it should be in.

Jul 17, 2014 at 10:43AM


Will the lights finally go out on RadioShack?

These days, the item that gets the most attention on RadioShack's (NYSE:RSHCQ) balance sheet is its dwindling cash sum, which had fallen to $61.8 million in its latest report, down from close to $500 million just 10 months earlier. But further down the balance sheet, there's a more curious line item. The electronics retailer has over $1 billion in treasury stock listed in stockholders' equity, a value that represents the cost of shares the company repurchased and is holding in its treasury. As of its most recent report, RadioShack held 45,428,000 shares, which it purchased for a total of $1.01 billion, or an average of about $22 a share. With shares trading for less than $1 today, that stock is nearly worthless compared to its original value. In other words, it represents nearly $1 billion in cash that the company could desperately use right now. 

Current management was not responsible for the company's earlier share repurchase program, which lasted from 2000 to 2011, but it seems reflective of a culture of poor cash management and an inability to understand industry dynamics. Notably, RadioShack's stock peaked in December 1999 with the tech boom, before the plan was even implemented. During 2000-2011, the company spent more on buybacks than it brought on from profits, allocating over $3 billion for buybacks while it made just under $2.7 billion in net income. Most of that stock was retired, which is why only $1 billion on the balance sheet, but Radio Shack was not exactly a thriving company for much of that time. Sales peaked in the late '90s and have been declining since 2007, and profits followed a similar trajectory. While the company was easily in the black during that period, spending over 100% of profits on buybacks is misguided, especially for a company that isn't growing.

Foolish final thoughts
The share repurchase program will not be the reason RadioShack goes bankrupt, but it is an accomplice. The retailer took on debt to fund those buybacks, and its turnover strategy, which involved closing 1,100 stores, was nixed by creditors who invoked covenants saying the company would only be able to close 200 stores or would otherwise have to liquidate. In its last four quarters, RadioShack has lost nearly $500 million, and without the ability to close unprofitable stores, it seems unlikely that the company will survive.

Share buybacks are a useful tool, but investors should be mindful of overspending on repurchases, especially by companies that are vulnerable to changing industry forces. Five to 10 years ago, it may not have been clear that electronics retailers would fall victim to and other online retailers, but it was certainly apparent that the Internet was changing the way people shopped. Now RadioShack needs to buy time with money it doesn't have. If only those shares were worth what it once paid for them.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jeremy Bowman owns shares of Apple. The Motley Fool recommends and owns shares of and Apple. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers