The writing appears to be on the wall for RadioShack (NYSE:RSHCQ). The ubiquitous electronics retailer has lost nearly $500 million in its last four quarters, badly missing earnings estimates along the way, and its cash balance has dwindled from $432 million to just $61.8 million as of its last report. Management's desperate plan to save the company -- closing 1,100 stores -- was quashed by creditors who would rather see the company liquidate then crumble slowly and leave no assets left over to pay its $613 million debt burden.
For stakeholders in the electronics chain, the pertinent question seems to be not if RadioShack will fold, but when. The retail electronics industry as a whole is struggling, but RadioShack's demise could present an opportunity for its competitors, namely industry leader Best Buy (NYSE:BBY).
Though RadioShack may be a failing business, it still generates more than $3 billion in sales annually, and while its 2013 revenue was only about 8% of Best Buy's, RadioShack's collapse could move the needle at its larger competitor. After all, those sales represent customers who shop at RadioShack and will have to search elsewhere to find the products they once purchased there if it closes.
To get a sense of the effects of one company's bankruptcy on its industry, let's take a look at some similar examples in the past.
Circuit City short circuits
The most famous of recent failures in electronics is Circuit City. With the economy plummeting into recession in late 2008, the then-No. 2 electronics retailer in the nation filed for bankruptcy in November. At its peak, CIrcuit City had $12 billion in sales, while Best Buy had grown sales 12.5% to $45 billion in the fiscal year ending Feb. 28, 2009, about when Circuit City said it would shut its doors. Surprisingly, Best Buy's sales growth slowed the next year to 10.4%, though that was also the same year that the recession peaked. Comparable sales, which offer a better reflection of retail performance because they strip out the effect of new store openings, acquisitions, and other one-time change that can affect the trendline, rose 1.7% at domestic stores during that year, though they fell in the previous year by 1.3%.
Compared to overall retail sales, Best Buy's performance looks even stronger. From 2007 to 2008, retail sales nationwide fell 0.9% as the financial crisis hit at the end of the year, and from 2008 to 2009 sales plummeted 7.3% during the worst of the recession. In electronics retail the drop was even sharper, falling 9.8% after a 1.8% drop the year before. That Best Buy was able to grow same-store sales during a year when industrywide sales dropped nearly 10% is no small feat. The evidence seems to suggest, then, that Circuit City's failure helped boost Best Buy that year, at least by a couple of percentage points. Notably, Best Buy's streak of double-digit revenue increases stopped after that year and is now falling, as it becomes a victim of the same forces punishing RadioShack.
Borders gets boarded up
Another recent high-profile bankruptcy in retail was outside of electronics, but can still shed some light on Best Buy's situation. In July 2011, Borders, the No. 2 bookstore chain in the country, was forced to liquidate, leaving a vacuum in book retail. Barnes & Noble (NYSE:BKS), the nation's No. 1 book retailer, is in a similar position to Best Buy's, seeing declining sales and facing stiff competition from Amazon.com. Importantly, Best Buy is still profitable while Barnes & Noble is not.
Before the recession, Borders had nearly $4 billion in revenue, compared to just over $6 billion for Barnes & Noble today. In its fiscal year ending April 30, 2011, B&N's retail sales were down slightly, falling by 0.4%, but that decline sped up in fiscal 2012 to 1.5% despite the closure of Borders' remaining 400 stores. However, comparable sales at its retail stores improved from 0.7% to 1.4% while overall sales fell due to store closures, and in its 10-K report, management said the company benefited from the Borders liquidation, which led book sales to be flat instead of declining as they did the year before. The growth in comps came from toys, games, and Nook products. While Barnes & Noble management acknowledged a benefit from the Borders closure, it did not seem significant, as same-store sales only improved by 70 basis points.
Barnes & Noble continues to struggle today, but the bookseller's position is not as precarious as some may think. Its retail and college bookstores are profitable, and its net losses have been narrowing. With the spinoff of the unsuccessful Nook unit planned, the bookstore chain should emerge from the red ink. Likewise, Best Buy, which is in a stronger position than B&N as it is not facing the digitization of the main product it sells, could remain a cash cow for years to come as the last iceman in electronics retail.
Based on the above examples, it seems like Best Buy would benefit from the eventual closure of RadioShack -- the only question is by how much. With only $3.4 billion in sales, or 8% of Best Buy's total revenue, a RadioShack liquidation would only add incremental sales for Best Buy at best, and it would not be enough to change the long-term sales trajectory of the big-box chain, which has been sliding in recent years. However, the decline appears to be slowing, as comparable sales have improved from negative 3.4% in fiscal 2013 to negative 0.8% in fiscal 2014. In its most recent quarter, domestic comps fell 1.3%, but that was during the period when many retailers suffered due to poor winter weather.
CEO Hubert Joly's turnaround plan, which has focused on cost-cutting, revamping online sales, and providing better customer service, has been an undeniable success as the stock price tripled last year, profits grew, and the company hiked its dividend. If Best Buy can find a way to lift same-store sales into positive territory, with or without a RadioShack bankruptcy, the retailer could have a much brighter future ahead of it than many assume.
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Jeremy Bowman owns shares of Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com, Apple, and Barnes & Noble. 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.