In a previous article, I wrote that RadioShack (NYSE: RSH) had run out of options, and that bankruptcy was inevitable. What may have been a possible turnaround story a couple of years ago has deteriorated into a company beyond repair, and RadioShack's most recent earnings report bears this out. While management remains optimistic, citing progress on the company's turnaround strategy, the numbers tell a very different story, and it's becoming clear that RadioShack is unable to compete with either online competitors or big-box rival Best Buy (NYSE:BBY). There is no turnaround story, and shares of RadioShack are on their way to $0.
The first few paragraphs of RadioShack's latest earnings report reads like CEO Joseph Magnacca is confident that the ship can be righted. While he talks about out the myriad of problems facing the company, from industrywide weakness to increased promotional activities of RadioShack's competitors, Magnacca also points to progress being made in the turnaround effort. New private label and exclusive items are being added to stores, and the company is remodeling 100 locations based on a concept store that has been performing well. Along with this, RadioShack plans to close 200 underperforming stores while continuing to cut costs.
Two years ago, this would have all sounded very reasonable. But RadioShack's results during the most recent quarter show a company that is rapidly unraveling, and the only question left is the timing of the bankruptcy filing. Here are some highlights from the quarter:
- Comparable store sales declined by 14%.
- Gross profit margin declined to 36.5%, down from 40.2% during the same period last year.
- SG&A expenses were 46.5% of revenue, up from 39.3% of revenue during the same period last year.
- Operating loss of $81 million, and eight-fold increase, year over year.
- The company's cash balance of $62 million is down from $180 million at the end of 2013.
While operating expenses decreased slightly -- $349.7 million compared to $351.2 million during the same period last year -- it rose significantly as a percentage of revenue. Remodeling 100 stores and closing 200 stores while thousands more are left to struggle isn't going to fix these problems. RadioShack originally announced its intentions to close more than 1,000 stores earlier this year, but its creditors shot that idea down. Without the flexibility to close more stores and slash costs, bankruptcy is RadioShack's only option.
A tough market
Consumer electronics is a highly cyclical industry, driven by exciting new products that consumers rush to buy. But recently, there hasn't been much in the way of innovation. During Best Buy's recent earnings conference call, management pointed toward a lack of innovation as the key reason why the consumer electronics market has been weak, and this trend has hurt RadioShack more than any other retailer.
Best Buy managed to gain market share during the first quarter, with its comparable store sales declining at a lower rate than the consumer electronics market as a whole. It did this by being aggressive with price, evidenced by its declining gross margin. But the company counteracted the negative effects by cutting costs.
RadioShack hasn't been able to accomplish the same feat. The saturation of the smartphone market in the United States is a big problem, and RadioShack can no longer simply ride the coattails of double-digit smartphone growth. The smaller stores are unable to compete with Best Buy on selection, and a slew of buying options for consumers, from stores operated by the wireless carriers to online retailers, are killing any profit that RadioShack was once able to achieve. Smartphones have become a commodity in the United States, and RadioShack simply doesn't have the scale or the cost structure to compete.
The bottom line
The numbers don't lie. RadioShack is out of time and nearly out of money, and given that it is unable to close enough stores to sufficiently cut costs, the next stop is bankruptcy. The stock has been pummeled,and now trades at barely more than $1 per share. While the stock could do nearly anything in the short term, its final destination is very likely to be zero.