Why RadioShack May Not Reach Its $3 Fair Value

RSH: RadioShack logo

RadioShack‘s (NYSE:RSH) stock price has plummeted in the last few days after the departure of its CEO, James F. Gooch, and its dismissal from the mid-cap index of the S&P Dow Jones Indices. In a way, his departure only confirmed that the company is facing a plethora of troubles. The stock price has declined from around $3 to just above $2 over the last 15 days.

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. A lot of blame for the company’s decline can be heaped upon industry factors which have shifted to RadioShack’s disadvantage, but the company is equally guilty of failing to adapt itself to the changing nature of the business. The business model looks outdated and there seems to be no catalyst to drive future growth.

We have a Trefis price estimate of $3 for RadioShack, which is at a premium to the market price. See our full analysis for RadioShack

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Changing Nature of Consumer Electronics Retail

Retailers like Wal-Mart and Amazon are taking business away from pure-play consumer electronics stores by offering huge discounts. Customers are still using physical stores to check out products and gain hands-on experience with gadgets. However, a large number of them then proceed to buy these from online stores like Amazon at cheaper prices. This phenomenon of show rooming has hit business hard for companies like RadioShack. The trend has been accelerated by changing consumer spending habits, which are shifting from high discretionary spending and debt taking to higher savings. [1]

Rivals like Best Buy (NYSE:BBY) are rapidly seeking to adapt to the new market reality by investing in building a robust online presence. RadioShack seems to be late to the party with its Omni-Channel initiative. While it has been listed as a key initiative for this year, we have yet to see any results. [2]

Lopsided Focus On Wireless Becoming A Liability

Historically, a major portion of RadioShack’s sales have come from the wireless segment. However, its wireless partner Sprint has been falling behind the competition. Sprint’s changes in customer and credit models have caused RadioShack’s sales and profits to fall. [3]

It is true that the company has been betting big on shifting to mobility devices like smartphones, but the problem here is again low margins. This segment is intensely competitive due to the presence of a large number of players. These include not just traditional rivals like Best Buy and players like Amazon, but also Apple Stores, plus AT&T and Verizon outlets. While devices like an iPhone contribute to higher sales due to big ticket prices, they yield very low margins due to the intense nature of the competition. [4]

In all fairness, RadioShack is taking certain steps to improve its gross margins. In the Mobility platform, the company is looking to leverage the emerging trends towards the prepaid wireless plans with the most recent launch of no-contract iPhones with Virgin Mobile. While there is a high upfront cost to cover the handset for the new iPhone, the monthly rates are much lower, and there is no contract or breakage fee for the customer. This caters not only to customers who are credit-challenged with the postpaid offers, but also stronger credit customers who don’t want a high monthly cost, or are looking to avoid the commitment associated with breakage fee. We are skeptical that this will be enough to provide a significant boost to gross margins. [5]

The company has not sought to diversify like Best Buy has. The latter has forayed into providing cloud services as well as a third-party market place to offer online products from other sellers in exchange for a cut from the proceeds. [6]

The company’s capital allocation strategies have also puzzled a lot of people. Even when the company had structural issues, it decided to take on debt to repurchase stock and pay a sizable dividend. It continued paying a dividend through July and meanwhile, the company’s debt status got downgraded. [7]

However, a few things could work in the company’s favor.

RadioShack is investing more in the training of store associates, introducing new mobile apps for iPhone and Android, and an eBay storefront. It has decided to provide online access to store level inventory information and improvements to the checkout process. It is looking to improve efficiency in its Target stores by using data to optimize the labor model at these locations. The company had a liquidity position of over $900 million, including restricted cash and available credit facilities, at end of Q2 2012. If this capital is deployed intelligently, it has the potential to drive future growth for the company.It needs focused and qualified management in place to identify the right growth drivers. Right now, the priority should be to recruit a good CEO.

You can go through a previous article here that we wrote on RadioShack’s problems. We are keeping a close eye on the company and expect a clearer picture to emerge once Q3 2012 results are declared later this month.

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

  1. Understanding U.S. Consumer Electronics Retailing, Cognizant Whitepaper []
  2. RadioShack Upgrades Online and Mobile for Holiday, RIS News []
  3. RadioShack Q2 2012 10-Q Filing, SEC []
  4. Will New CEO Recharge RadioShack?, Barron’s []
  5. RadioShack Q2 2012 Earnings Call, Seeking Alpha []
  6. Why Best Buy Is Still Worth $25, Trefis []
  7. Is It Time To Bet On Radio Shack?, Seeking Alpha []