In the world of electronics retailing, there's been a disturbing phenomenon taking place over the past few years. Brick-and-mortar retailers are struggling to keep customers coming through the doors, despite the steady economic recovery since the financial crisis and buoyant consumer spending.
A term was created to describe the woes facing physical retailers like Best Buy (NYSE:BBY). That term is 'show-rooming', and it involves shoppers going into stores, looking at merchandise in person and asking questions to staff, then leaving to purchase the item more cheaply on the Internet.
While Best Buy has struggled, it's at least holding its own. For the clearest indication of the show-rooming effect, look no further than RadioShack Corp. (NASDAQOTH:RSHCQ). Dark storm clouds are gathering above RadioShack, and its collapsing sales and share price are the evidence. To put it simply, RadioShack might not have much time left.
The rush to close stores and cut costs
Shares of RadioShack fell 10% after reporting first-quarter earnings, and it's easy to see why. Same-store sales, which measures sales at locations open at least one year, fell 14% during the quarter. Management attributes this specifically to declines in customer traffic, as well as weakness in its mobility business.
RadioShack is trying desperately to reverse this, and is spending more money on promotions to try to lure traffic. This has resulted in rising selling, general, and administrative expenses. Unfortunately, this has only quickened the decline in the company's profitability. RadioShack's loss more than quadrupled year over year, to $98 million in the first quarter.
These same factors are hurting Best Buy as well. Its own first-quarter same-store sales fell 1.9%. Its longer-term performance is weak too.Sales at Best Buy locations open at least one year fell 0.8% last year after a 3.5% drop in comparable-store sales in the previous year.
But there's a critical difference between Best Buy and RadioShack, and that is that Best Buy is diversified across product categories and has been able to shift its business to more profitable mixes. Best Buy is also working to build its online presence. It's investing in ship-from-store and digital marketing, and the results are really helping. Best Buy's comparable online sales in the U.S. jumped 29% last quarter.
Perhaps most importantly, Best Buy is profitable. This allowed it to recently raise its dividend by 12%.
RadioShack's answer thus far seems to be to close stores. The company announced it will close as many as 200 locations this year.
To be fair, RadioShack did announce an initiative recently which it hopes will stem the decline in customer traffic. It will partner with hardware start-ups directly, to try to lower the barriers that keep start-ups out of retail. Typically, contract terms from most retailers are prohibitive for entrepreneurs, who normally can't produce enough inventory to get their products on shelves. RadioShack hopes this will stimulate its customer base, which the company believes is very tech-savvy and receptive of niche products.
But the simple fact is that RadioShack's situation is dire, and this initiative is unlikely to get the job done. Losses are soaring, and core issues, namely a huge drop in traffic and sales, will remain. These measures may help to stop the bleeding, but they aren't a long-term solution.
Equally alarming is RadioShack's cash burn. The company ended the quarter with just $61 million in cash and cash equivalents, compared to nearly $180 million at the beginning of the year.
This is even more worrisome considering RadioShack has a significant amount of debt about to come due. The company has total debt on the books totaling $614.5 million, which matures between 2018 and 2019. With such dramatic losses piling up and its current cash bleed, long-term solvency is a real concern.
The Foolish bottom line
RadioShack simply doesn't have the brand connection with consumers that it used to. It's looking more and more like an aging relic that can't compete in the age of Internet retailing. Whereas Best Buy is getting proactive to combat 'show-rooming', by building its online business, RadioShack is standing still. It's simply going to close stores to try to boost profits.
It needs to have an online strategy, because that's where sales at shifting. Brick-and-mortar stores aren't cost competitive with Internet retailers, and that's causing customers to flock for the exits.
Management needs to understand the severity of the situation before it's too late. With so much debt coming due in five years, there isn't a lot of time left.