I'm having some deja vu -- this isn't the first time I've wondered when RadioShack (NYSE:RSH) will stop its downward slide. Judging by the Fool's recent coverage, things have gone from bad to worse for the electronics retailer, and last week's earnings report was no exception.
RadioShack reported first-quarter profits down 85% to $8 million, or $0.06 per diluted share. Sales increased just 3% to $1.12 billion, while same-store sales decreased by 1%. Lagging wireless sales were implicated in the particularly abysmal results, and margins suffered because of an unfavorable product mix, increased promotional activity, and higher sales growth in the lower-margin kiosk channel.
As expected, writedowns relating to RadioShack's turnaround plan reduced pre-tax net income by $10 million. Expenses increased. Cash on the balance sheet dropped 85% to $45 million. Free cash flow's getting eroded by the company's lower net income and changes in payables and inventory. And although RadioShack stood by its guidance to generate $50 million to $100 million in free cash flow for this year, several analysts on its conference call questioned that forecast. The company responded that reaching its free cash flow target would imply that its turnaround initiatives had succeeded.
RadioShack's a tough sell these days (or would that be a tough buy?). Either way, I'd say its shack isn't exactly shipshape. Its troubles also include management flux -- its CEO recently resigned amid a scandal, although longtime Fool Rick Munarriz pointed out that he made a pretty convenient scapegoat -- and it's attempts to restructure. While RadioShack once used its high store count as a marketing ploy, stating that 94% of Americans could find a RadioShack within five minutes of where they lived or worked, now it plans to close underperforming stores while it tries to plug its leaky roof.
Whether you're judging by our most recent Foolish Forecast, last quarter's dismal results, or the fact that even the holiday season couldn't help it, it has been clear for a while that RadioShack needed renovation. Even when things were all a go-go, a very logical question then was how long RadioShack's success in wireless sales could keep buoying its results (here's a flashback to early 2004, in fact, with questions about its increasing emphasis on wireless, and later that year, it was still a good question). That has turned out to be a major issue indeed.
For anyone who's noticed RadioShack's currently low P/E and has felt compelled to dig to see whether value lies in this stock, be sure to add a question to the number-crunching: What is RadioShack's sustainable competitive advantage? Just for starters, look at its rivals: Circuit City's (NYSE:CC) hungry, Wal-Mart's (NYSE:WMT) cheap, Amazon.com's (NASDAQ:AMZN) convenient, Best Buy (NYSE:BBY) innovates by gearing its stores toward different demographics depending on location, and all of the above have larger, more extensive selections (there's a reason why it's not called RadioMansion). This is by no means a new or original sentiment, but it's an important one, if RadioShack's to become shipshape again.
David Gardner picked both Amazon.com and Best Buy as Motley Fool Stock Advisor selections. To see what other stocks David and his brother Tom like for the long term, try a 30-day free trial.
Alyce Lomax does not own shares of any of the companies mentioned.
