Like an organ donor's death allowing someone else to live a longer, healthier life, RadioShack's (OTC:RSHCQ) bankruptcy filing could help Sprint (NYSE:S) live to a ripe old age. The struggling wireless carrier will set up shop in some 1,750 RadioShack stores in a co-branding effort that will see Sprint's retail footprint more than double, giving it the chance to reach even more customers.
The third-largest U.S. carrier behind Verizon (NYSE:VZ) and AT&T (NYSE:T) surprised analysts by dramatically slowing customer losses in its fiscal third quarter. Though its quarterly loss of $2.4 billion, or $0.60 per share, more than doubled from a year ago, much of that was due to a one-time $2.1 billion charge it took reducing its trade name's value because it expected lower revenue and larger customer losses in the wake of its 2013 acquisition by SoftBank. Excluding the nonrecurring costs, Sprint would have posted a loss of $0.24 a share.
Growing its retail base
Part of Sprint's recovery plan is to expand its number of retail locations. Sprint operates more than 1,100 company-owned stores, and the deal with RadioShack will boost that number to nearly 3,000.
The consumer electronics retailer filed for bankruptcy protection Thursday after a lengthy effort at reversing substantial declines in revenue over the past few years. It's own turnaround plans were thwarted by lenders who feared they wouldn't recoup their money if the retailer shrunk its retail presence as much as it had wanted.
Now undergoing Chapter 11 reorganization, RadioShack will sell as many as 2,400 stores to General Wireless, a subsidiary of its largest shareholder, hedge fund Standard General. The investment firm will seek to close the remainder of the 4,000 stores RadioShack operates.
Sprint's deal with Standard General has the carrier opening stores-within-a-store in 1,750 locations, co-branding them under the Sprint and RadioShack banners, and having Sprint employees selling mobile devices and Sprint plans.
Finally, its numbers turn north
In the third quarter Sprint reported its first quarterly gain in subscribers in three years, after luring in new customers with price cuts and promotions such as "cut your bill in half" spots that featured new customers sawing, hacking, and shredding their Verizon and AT&T bills.
The promotional effort, though, drove down Sprint's quarterly segment revenue by 0.6% to $8.43 billion as net losses from postpaid customers fell dramatically to just 19,000 from 69,000 a year ago and 336,000 in the prior quarter. In comparison, Verizon posted a net increase of 627,000 postpaid customers. However, Sprint added almost 1 million total wireless subscribers in the three months ending on Dec. 31, which was well above Wall Street analysts' estimate of 790,000.
The promotional environment, though, led to average revenue per user, or ARPU, to fall to $58.63 for postpaid customers, down from $63.44 a year earlier. While Barron's said Sprint's postpaid net losses suggests it added a net of 186,000 tablets, Sprint said tablets generally generate a significantly lower ARPU than other postpaid connections.
Sprint also faces higher churn rates than the competition. While this turnover rate in its customer base improved by 12 basis points in the quarter, there's still a lot of work there left to do.
Limits to cutting costs to the bone
Still, Sprint's strategy will only take it so far, as cutting prices and offering promotions to attract new customers cut into its financial metrics. Increasing its retail footprint can help; while the store-in-store boutique minimizes costs less than owning or operating the retail locations itself, the risk to Sprint in the RadioShack deal is whether that nameplate remaining on the building will draw in customers.
One has to imagine the reorganization of the undead RadioShack will benefit from the association with Sprint, but RadioShack's damaged brand might not help Sprint's image. However, this is only the first phase of the carrier's turnaround, and the contribution from RadioShack is just a small part in Sprint's overall plan to dial up healthy returns once more.