Will A New CEO Solve RadioShack’s Problems?

RadioShack (NYSE:RSH) announced that its Chief Executive Officer, James F. Gooch, is stepping down after 16 months on the job. The company board decided that the time was right to make this decision. It felt that Gooch was not the right person to be in-charge in the current environment mired with several challenges. The stock has shed 80% of its value over the past year, and the company has been struggling with higher costs amid declining sales in its more profitable consumer electronics division.

The management is now keen to put in place the right leadership to address the company’s challenges and capitalize on its opportunities. Chief Financial Officer Dorvin Lively has been chosen to step in as acting CEO until the company names a permanent successor. Lively has been a finance veteran for retail and consumer-products companies and joined RadioShack in August 2011 from Ace Hardware Corporation. The board plans to use an executive search firm to help find a successor to Gooch. ^[1]

See our full analysis for RadioShack

What Has Gone Wrong With RadioShack?

There has been a significant decline in TV and computer sales over the past couple of years as consumers are more inclined to buy smaller gadgets like mobile phones, tablets and e-readers. Sales for the latter category are higher than for other gadgets. Thus, RadioShack has focused its growth strategy on selling more expensive tablets and smartphones, which benefit from stronger demand.

The flip side to this strategy is that it faces fierce competition from online retailers as well as wireless carriers, whom it relies on as partners. This not only eats into its sales, but also forces it to lower profit margins. Apple’s (NASDAQ:AAPL) iPhone is a prominent example of a device that RadioShack is forced to sell at a lower margin.

The company is also facing increasing competition from Best Buy (NYSE:BBY), which has shifted its focus to operating small-format stores dedicated to selling mobile phones, e-readers and tablets. Best Buy is concentrating on opening these stores in strip malls, which have traditionally been RadioShack strongholds. To add to its misery, RadioShack suffers from the problem of a dated image. Best Buy, in contrast, is keen on setting up modern stores that would help it attract leasing agents. It has trained its salesmen to be smart and show customers how gadgets work together. These contribute toward a better customer experience and will help Best Buy gain an upper hand over RadioShack. ((Best Buy Takes on RadioShack in Mobile Strip-Mall Push: Retail, Bloomberg))

There has been a drastic change in the way consumers shop today. Revenues of brick and mortar retailers like Best Buy and RadioShack are being adversely affected as customers visit the stores to browse through products and eventually buy them online at cheaper prices — a phenomenon known as showrooming. We think that Best Buy may be able to mitigate the adverse effects of changing consumer preferences by offering better consumer experience and after-sales service in the mobile devices segment, as explained above. However, to expect the same from RadioShack is a tall order since it is not known for such services.

RadioShack suspended its dividend in July after posting an unexpected loss amid sluggish consumer spending and increasing dependence on mobile phone sales. The shift within mobility sales toward lower margin smartphones was the main driver behind declining margins.

We believe declining gross margins will remain a significant issue for RadioShack. Excluding the postpaid wireless business, the gross margin rate for RadioShack has remained flat. We have revised our estimate for RadioShack’s gross margins and expect them to witness a decline of 1% in 2012. It is difficult to be optimistic about gross margins at this point as there seems to be no concrete plan in place to counter the downhill slide. ^[2]. You can see the effect of gross margins on the company’s Trefis price using our interactive chart below:

We have a Trefis price estimate of $3 for RadioShack, which is at a 20% premium to the current market price owing to the sharp decline witnessed on Tuesday after S&P Dow Jones Indices booted RadioShack from its midcap index, citing the company’s small market capitalization.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. RadioShack CEO Departs After a Year, WSJ [↩]
2. RadioShack Needs Big Changes To Fight Negative Trend, Trefis [↩]