RadioShack (NYSE:RSH) is known for being an electronics dealer that specializes in hard-to-find items -- the kind that Motley Fool Stock Advisor recommendation Best Buy (NYSE:BBY) and Circuit City (NYSE:CC) choose not to carry. It reaffirmed its reputation as a specialty store in my eyes when I was looking for an obscure SanDisk memory card and finally found it at -- you guessed it -- a RadioShack store.
This kind of specialization has its benefits, but it also carries a significant drawback. Consumers like me are likely to start out looking for what we want at a Best Buy, because more likely than not, we'll find what we are looking for, as well as various other accessories and products. RadioShack stores lack the scale to offer such an ability.
Because it loses out on impulse sales from customers, RadioShack's business model has become increasingly dependent on its bread-and-butter revenue streams, such as cell phones. My Foolish colleague Alyce Lomax has been tracking the progress of RadioShack's struggling wireless sales throughout the year. And as one would expect for a business overly dependent on a particular source of revenue, RadioShack's stock has fallen to two-year lows now that cell phone sales have been tougher to come by.
Although skeptical of its impact, Alyce recently pointed out that RadioShack is trying to right the ship by inking a deal with InPhonic (NASDAQ:INPC), which will allow customers to buy wireless products online. No doubt the company desperately needs to keep wireless traffic brisk, considering that non-wireless sales were up a mere 5% in the third quarter.
Total sales were up 8% from the same period a year ago, fueled by a 15% increase in wireless sales. However, profitability took a dive as operating margins declined 30 percentage points to the current level of 7.4%. The company blamed the margin pressure on an "aggressive inventory clearance sale." As a result of the drop, net income, excluding a non-recurring gain of $56.5 million, actually declined 13% compared with the same period a year ago.
Struggling sales and profitability pressures, plus inventory growth that's outpacing revenue growth, and an unattractive long-term debt-to-cash ratio are all reason enough to be wary of this investment. Perhaps the greatest concern is that there is little evidence of a plan from RadioShack to get the struggling enterprise turned in the right direction. I echo Alyce's sentiments: Until RadioShack proves it can pull itself together, Foolish investors are better off taking their money elsewhere.
Plug into more RadioShack Foolishness:
- Shopping Online at RadioShack?
- RadioShack Holds the Phone
- No Surprise at RadioShack
- RadioShack's Wireless Woes
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
