The market was broadly down on Monday. However, shares of RadioShack (NYSE: RSH) rose by more than 3.3% in a difficult market environment as investors reacted positively to the company's Super Bowl ad. It's nice to see the company recognizing its problems and even making fun of itself, but RadioShack has a long way to go before it can be considered a convenient investment opportunity.
The '80s called: They want their store back
RadioShack's spot features a cashier receiving a phone call and saying to a coworker: "The '80s called: They want their store back." After that, a bunch of popular characters and celebrities from the '80s -- including Hulk Hogan, Alf, and Erik Estrada from CHiPs -- enter a RadioShack store to dismantle it and take away outdated products like VCRs. The ad ends with a renewed and more up-to-date RadioShack store, where customers seem to be testing a smartphone.
The ad generated a lot of attention, and it was a smart move by the company. Not only due to its resonance, but also because it admits the company's problems and promises customers that it will implement the necessary changes to regain the relevancy RadioShack has lost over the years.
However, RadioShack's difficulties go well beyond its communication strategy, and the successful Super Bowl ad is hardly enough reason to believe in a viable turnaround for the company.
RadioShack has been affected by stagnant sales and falling profit margins over the last several years, the company is losing money as of the third quarter of 2013, and there is no sign of a turnaround at this stage.
Sales during the quarter ended on Sept. 30 fell by 10.3% to $805.4 million versus $898 million in the same period of 2012. Same-store sales collapsed by 8.4% year over year, and profit margins fell during the quarter as the company reduced prices and accelerated its merchandise assortment changes.
RadioShack is trying to reposition the brand, improve customer experience, and revamp product assortment to turn sales around. At the same time, management intends to increase operational efficiency and financial flexibility. Those targets are not easy to reach on a stand-alone basis, and they represent a formidable challenge when considered in conjunction.
In December, RadioShack announced a new five-year financing deal for $835 million, which the company plans to use to refinance existing debt and provide approximately $200 million of incremental liquidity. Financial risk seems to be under control by now, but it's hard to tell what the future will bring for the company.
Against the trend
Electronics retailers are facing some truly challenging headwinds as consumers turn to online players like Amazon.com (NASDAQ:AMZN) in the search for convenient prices and a comfortable experience.
Major electronics retailers like Best Buy (NYSE:BBY) are reporting dismal performance lately. The company announced that domestic comparable-store sales declined by 0.9% during the nine-week period ended on Jan. 4, while total revenue fell by 2.6% and total domestic sales declined by 1.5%.
The only strong spot in Best Buy's sales report was a big increase of 23.5% in online sales, but the figure also shows that the online channel is a crucial competitive factor in the industry, and Amazon is the indisputable leader when it comes to e-commerce.
Amazon delivered lower-than-expected sales for the fourth quarter of 2013, but the company seems to be clearly gaining market share in different retail categories, especially in electronics. Electronics and general merchandise -- EGM -- sales in North America increased by 25% annually to $10.65 billion during the quarter, far outpacing its competitors in the business.
Consumer spending has been weak over the last several quarters, and online retailers like Amazon are rapidly gaining market share versus traditional players. The context is not very helpful at all when it comes to RadioShack and its turnaround possibilities.
RadioShack needs much more than funny ads if it's going to turn the business around. Falling sales and negative margins are a serious risk for investors, and industry trends like rising competitive pressure from online retailers represent a remarkable challenge for companies in the business. The Super Bowl ad was a smart move, but it hardly changes anything when it comes to evaluating an investment position in RadioShack.