Earlier this year, RadioShack (RSH +0.00%) installed a new management team that was tasked with turning around a rapidly deteriorating business. RadioShack's legacy products like cables, adapters, and computers have been under pressure for years. Moreover, the company's move to focus on selling mobile devices was faltering in the face of strong competition from Best Buy (BBY +0.48%) and others.
In the second quarter, RadioShack showed some signs of life, posting its first comparable store sales gain since 2010. But at the time, CEO Joseph Magnacca warned that investors should expect an uneven performance over the next few quarters as the company implemented its new strategy.
On Tuesday, investors saw exactly what Magnacca was talking about. RadioShack reported a significant drop in sales and an even more dramatic fall in earnings for the recently ended third quarter. While management did have some good news to report on the success of RadioShack's new concept stores, these efforts may be too little, too late.
A sales stumble or something worse?
In the third quarter, comparable store sales dropped 8.4% year over year, with declines in all product categories. Gross profit dropped from $341 million to $243 million, with about half of the decline attributable to writedowns for inventory that is being discontinued and sold below cost to wholesalers and clearance businesses.
Part of the shortfall in sales may be attributed to clearance activity, as RadioShack decided to simplify its stores by cutting the number of SKUs (distinct products) that it carries from 4,500 to 3,500. This reduction in SKUs could be a longer-term headwind to revenue if some customers can no longer find what they are looking for at RadioShack. But that effect should be offset by the introduction of new products like fitness gear.
A bigger worry is RadioShack's performance in the mobile category. The company's strategy still revolves around selling lots of smartphones and tablets and then adding on higher-margin accessories like cases and chargers. But the mobile market may be moving away from RadioShack.
Trouble in mobile
The U.S. smartphone industry is increasingly dominated by just two players: Apple (AAPL +1.08%) and Samsung (NASDAQOTH: SSNLF). As of August, a whopping 65% of U.S. smartphone subscribers used an Apple or Samsung device, and that percentage has been growing rapidly. This emerging duopoly could be a big problem for RadioShack.
Apple already has a significant retail footprint in the U.S., with more than 250 Apple Stores here. CEO Tim Cook hopes to eventually sell half of all new iPhones in the U.S. through the Apple Store, up from less than 15% today. It's not clear how Apple could reach that goal, but possible strategies include aggressively adding new Apple Stores, providing better trade-in offers, or offering new enticements to customers who buy through the Apple Store.
Meanwhile, Best Buy unveiled the "Samsung Experience Shop" earlier this year. These shops have received priority placement within Best Buy stores, and feature consultants hired and trained by Samsung to assist customers who are interested in Samsung devices. Best Buy has now rolled out around 1,400 of these stores-within-a-store.
Best Buy's Samsung Experience Shop. Source: Best Buy.
The likely result is that the Apple Store will gain market share for iPhone sales over time, while Best Buy will gain market share for sales of Samsung phones. Retailers like RadioShack that rely on being an "honest broker" will be less useful the more the smartphone market becomes a two-horse race. Adding insult to injury, if RadioShack continues to lose shares in mobile, it will also have trouble selling high-margin mobile accessories.
Not dead yet, but not much hope
I think it is unlikely that RadioShack will be able to establish its relevance with a new generation of customers. The company is too reliant upon selling mobile devices and accessories, and market conditions are deteriorating for "neutral" retailers, compared to brand-oriented stores like the Apple Store and Best Buy's Samsung Experience Shop.
As a result, RadioShack will not be able to recover the revenue it has lost over the last two years. Furthermore, the company's operating expenses are already quite low, so it doesn't have the ability to cut its way to profitability. RadioShack has a fairly strong balance sheet, which could allow it to stagger on for a few more years, but by the end of the decade I expect this storied company to disappear.
