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

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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 Amazon.com 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.

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

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