After being part of the American retail landscape for more than 90 years, the iconic RadioShack (NYSE:RSH) brand is today struggling to survive. The landscape of the consumer electronics retail industry has changed rapidly in a matter of few years with the entry of online players like Amazon. The traditional brick-and-mortar retailers are gasping for breath and those without ample resources face the threat of extinction.
RadioShack has failed to put in place a comprehensive and definite strategy to deal with market challenges. After keeping the CEO seat vacant for a long time, it finally got itself one in the form of Joseph Magnacca, who was previously an Executive Vice President at Walgreen, a drugstore chain. The choice seems surprising given that Magnacca has no previous experience in the consumer electronics industry and has been working in the drugstore industry for over a decade.
The company doesn’t seem to have enough firepower on its balance sheet to make any aggressive moves in the market to challenge bigger and better equipped rivals. Put simply, the business model looks outdated and there seems to be no growth catalyst in place to inspire confidence among investors.
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Here’s a recap of the challenges facing RadioShack and the problems besetting the company.
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 showrooming has hit business hard for companies like RadioShack. There was a new development this month when Best Buy (NYSE:BBY) announced making its price-matching policy permanent to put an end to showrooming. The company will match the prices offered by select online retailers and other brick-and-mortar competitors across a wide range of products, irrespective of whether the customer makes the purchase from a store or online. 
We think that while Best Buy can afford to take a hit on margins in exchange for market share, RadioShack doesn’t have the resources to follow in Best Buy’s footsteps. In 2012, RadioShack’s revenue declined by just 2.7%, but gross margins dropped from 41.4% to 36.7%. The steady erosion in gross margins is largely responsible for the overall loss in 2012. ((RadioShack 2012 10-K, SEC))
RadioShack’s mobility business, largely responsible for its declining gross margins, competes with “Best Buy Mobile”, the chain of stores Best Buy is aggressively expanding. This limits the maneuvering space for RadioShack to experiment with new business models in this segment.
Lopsided Focus On Wireless Becoming A Liability
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 intense competition.
Key Aspects Of 2012 Results
RadioShack continued to see year-over-year growth in its high margin Signature business, which generated growth of 2% in 2012. In particular, the wireless accessories and headphones businesses did well and RadioShack aims to focus on these going forward as well.
The company suffered losses due to poor performance of its Target mobile business. On January 14, RadioShack announced an end to its relationship with Target where it helps operate Target Mobile in 1,500 Target stores. The relationship will stand terminated effective April 8, 2013.
The consumer electronics business continued to experience a sales decline in line with trends in the rest of the industry. Revenues declined from $861 million in 2011 to $662 million in 2012, a 22% decline. However, the company managed to arrest a decline in margins in this category and generated higher gross profits in dollar terms despite a steep sales decline. RadioShack’s smaller footprint does not allow it to carry the breadth of products that would make it competitive vis-a-vis other brick-and-mortar retailers and online channels. As a result, we expect this segment to remain under significant pressure going forward. 
No Information On A Turnaround Strategy
We are disappointed at the continued absence of any news about steps RadioShack might be taking to counter competition from online sellers like Amazon and other brick-and-mortar stores. RadioShack’s mobility business, largely responsible for its declining gross margins, competes with “Best Buy Mobile”, the chain of stores Best Buy is aggressively expanding.
RadioShack had reserves of $535 million at the end of 2012 but it also needs to make debt repayments of $287 million in 2013 which will reduce its financial flexibility in case it wishes to undertake new initiatives or acquisitions to diversify. Until the time the company’s new CEO articulates a credible turnaround strategy, we see no apparent catalyst for dramatic future growth.
We have a Trefis price estimate of $3 for RadioShack, which we will be revising shortly in view of the recent results.Notes: