After sinking to less than $14 in early July, RadioShack's (NYSE:RSH) stock has surged to almost $19. In fact, on yesterday's preliminary earnings announcement, the stock increased by 12%. There's no doubt the company has made significant progress. Yet investors should note that there are still underlying problems for the long term.
The company's CEO, Julian Day, took charge last summer, and he's has wasted little time in restructuring operations. He has a top-notch track record for turnarounds, including his performance at Kmart, now part of Sears Holdings (NASDAQ:SHLD), and his successful stint at Safeway (NYSE:SWY).
His formula is fairly straightforward -- cutting costs via layoffs, store closings, and improved inventory management -- and it's working. For the fourth quarter, the company expects net income to exceed its the $51 million it reaped in the year-ago period.
RadioShack's problems lie on its top line. In the fourth quarter, RadioShack suffered from a 7.8% decline in same-store sales. True, the company suffered a negative impact because of contract changes with wireless carriers. But even factoring that out, same-store sales still fell 5.5%.
Unfortunately, while Day is saying the right things, such as "It is not our intention to chase unprofitable business," he sees continued weakness in 2007. Things may have to get a bit worse before they get a lot better.
Simply put, RadioShack has little mindshare with consumers. It cannot offer the breadth of major electronics retailers such as Best Buy (NYSE:BBY) and Circuit City (NYSE:CC). Moreover, it does not have the kind of differentiation of specialty retailers such as GameStop (NYSE:GME).
It does seem that the company has stabilized, with its cash balance increasing from $225 million to $450 million over the past year. However, that cash flow will start to suffer if sales continue to fall.
Basically, Day needs to rethink RadioShack's format -- and perhaps even change the company's name. Any fixes he makes will take more than a few quarters; most likely, we're looking at a couple of years.
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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 655 out of 19,500 participants in Motley Fool CAPS.
