RadioShack (NYSE:RSH) is primarily engaged in the retail sales of consumer electronic products and services via its chain of RadioShack stores. It operates through 4,476 company operated stores in the U.S., Puerto Rico and the U.S. Virgin Islands, 1,091 dealer outlets (including 33 outside North America) and its commercial website - www.radioshack.com. RadioShack also has 227 company-operated stores under the RadioShack brand, 9 dealer stores and one distribution center in Mexico. Additionally, it used to operate 1,496 Target Mobile centers but terminated its relationship with Target in April this year.
Being a prominent player in the retail business for over 90 years, RadioShack has been struggling to survive in the industry as the level of competition has risen manifold in the last few years. In addition to eroding top-line growth, the company has been witnessing declining gross margins over the years which has impacted its bottom-line.
Nevertheless, after the appointment of a new CEO earlier this year, RadioShack recently announced a turn-around plan with which it hopes to revive its business and return to profitability in the future. We remain cautious on RadioShack’s future outlook as we believe it is too soon to gauge the impact of the recent efforts.
In this article we list the key drivers that make up RadioShack’s business and discuss certain recent trends that impact its performance. See our full analysis for RadioShack
What Are RadioShack’s Key Business Segments?
RadioShack has three main product line – Mobile platform (includes postpaid and prepaid wireless handsets, prepaid wireless airtime, tablets and e-readers etc.), Signature platform (includes home entertainment, wireless, computer, and music accessories, headphones etc.) and the consumer electronics platform (includes laptops, digital music players, home telephones, GPS devices, cameras, digital TV etc.) In fiscal year 2012, the wireless platform was the largest contributor to total revenues with a 51.5% share followed by signature and consumer electronics which contributed 33.9% and 14.6% respectively.
In 2012, Radio Shack earned $4.3 billion in revenues and earned 36.7% gross margins on the same. The steady erosion is gross margins led to a net loss of $139 million for the year. The company spends close to 30% of its revenue on its marketing (SG&A) initiatives but has a low capex (4% of gross profits). We have broken down RadioShack’s business into two segments – U.S. Radio Shack Stores and Non RadioShack Stores.
1. U.S. RadioShack stores: RadioShack earns a little over 80% of its revenues from its U.S. branded stores. At the end of fiscal 2012 it had 4,395 stores operating in the US with an average square footage of 2,464 per store and revenue per square foot of $319. While we forecast the RadioShacks stores square footage per store as well as revenue per square foot to remain around the existing level during our forecast period, we believe that the company might have to resort to store closures in order to save costs and increase its focus on boosting online sales.
2. Non-RadioShack stores: This segment includes sales generated by Target Mobile centers, sales to independent dealers, sales generated by the Mexican subsidiary and the company website, as well as sales to commercial customers and other third parties through global sourcing operations. RadioShack derives less than 20% of its revenue from this segment and we estimate sales to increase moderately in the coming years.
What Are The Key Trends Impacting RadioShack’s Business?
Here are some key trends that have negatively impacted RadioShack’s business in recent years:
1. Challenges faced by the consumer electronics retailing industry
The entry of online retail giants such as Amazon has altered the landscape for the consumer electronics market. Retailers like Wal-Mart and Amazon are taking business away from pure-play consumer electronics stores by offering lucrative discounts. Showrooming, a phenomena where customers use physical stores to check out products and gain hands-on experience with gadgets but use online stores to make the purchase, has negatively impacted sales of traditional brick-and-mortar retailers.
Earlier this year, RoadioShack’s competitor Best Buy (NYSE:BBY) announced making its price-matching policy permanent in order to put an end to showrroming. The company now matches 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 for additional market share, RadioShack doesn’t have the resources to. 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.
2. Low margins in the wireless business
RadioShack has been betting big on shifting its focus to mobility devices like smartphones, an area which is expanding fast but offers comparatively lower margins. This segment is intensely competitive due to the presence of a large number of players including not only traditional rivals like Best Buy and Amazon but also Apple Stores, AT&T and Verizon outlets. While smartphones such as iPhone contribute to higher sales due to their high prices, they yield very low margins for retailers such as RadioShack due to the intense competition in the market.
3. Weakness in the consumer electronics segment
The consumer electronics industry is witnessing a decline in sales of laptop computers, digital music players, televisions, GPS devices and cameras which has led to lower revenues from RadioShack’s consumer electronics business. A continous improvement in the macro environment can help increase demand for these products in the future.
Read more about RadioShack’s recent initiatives to revive its in business in our article: What’s RadioShack Doing To Revamp Its Image And Stock?
TheTrefis price estimate of $3.20 for RadioShack is almost in line with the current market price.