On Thursday afternoon, struggling consumer electronics retailer RadioShack (RSH +0.00%) announced that it has appointed a new CEO, Joseph Magnacca. Magnacca is currently an EVP at Walgreen, responsible for marketing and merchandising at the drugstore chain. According to RadioShack's SEC filing this morning, Magnacca will have a base salary of $1 million with a target bonus equal to 120% of that amount, and will also participate in a long-term incentive bonus program. Magnacca will receive a $1 million signing bonus this month, and will also receive 500,000 restricted stock units over three years. Lastly, Magnacca will be eligible to earn stock options for up to 2.5 million shares (contingent on meeting performance goals).
Magnacca seems like an odd choice for RadioShack's top job. He has no experience in the consumer electronics industry. He has worked in the drugstore industry for over a decade, and worked at Canadian supermarket chain Loblaws prior to that. Given the magnitude of RadioShack's challenges, the company is clearly taking a big gamble by hiring an outsider like Magnacca. However, RadioShack clearly needs fresh thinking, so thinking "outside the box" could prove to be a risk worth taking.
And now, a new strategy?
Magnacca will have to get his hands dirty from day one in order to fix RadioShack. The company's traditional business -- selling cables, adapters, parts for DIY projects, computers, TVs, etc. -- has been declining for several years. To some extent, demand for these products has dropped, while competition from online retailers such as Amazon.com has grown rapidly.
In response to this trend, RadioShack tried to diversify its revenue base by expanding into the "mobility" segment by selling cellphones and wireless plans, as well as cellphone accessories. However, the company has found that wireless product gross margins are very low. Additionally, RadioShack faces strong competition in this segment.from Best Buy's "Best Buy Mobile" stores, which carry a similar product mix. Moreover, Best Buy plans to grow the Best Buy Mobile concept significantly going forward.
Thus, RadioShack needs a new strategy. Through the first nine months of 2012, RadioShack's revenue declined by just 1%, but gross margin dropped from 44.4% to 37.6%. The company therefore swung from net income of $60.3 million to a loss of $76.1 million. RadioShack's current market cap of $325 million is still $300 million below tangible book value, but with losses piling up, that cushion could soon disappear.
While Magnacca has been a successful executive, I am skeptical that he can turn this ship around, given his lack of industry knowledge. RadioShack is being crushed by industry trends and big "market forces," and Magnacca doesn't have much time to learn the ropes before making important strategic decisions. Until he puts forward a credible turnaround plan for RadioShack, investors should probably avoid the stock.
