RadioShack’s Turnaround Strategy Is Failing To Show Gains So Far

RadioShack (NYSE:RSH) has been reporting disappointing results for quite a while and its Q2 2013 was not very different. While revenues were flat y-o-y, the company’s gross margin declined to 37.2%, compared to 40.1% in Q2 2012, which expanded its net loss from $14.1 in Q2 2012 to $41.4 million in Q2 2013. RadioShack has been a prominent player in the retail business for over 90 years but has been struggling recently to survive in the industry with rising competition from online retail giants such as Amazon.

Last quarter, RadioShack announced its turnaround strategy, offering a broad overview of how it plans to tackle the dire challenges facing the company. It claims to be making strong progress on repositioning its brand, revamping the product assortment and reinvigorating its stores. RadioShack hopes to achieve higher operational efficiency and improve its financial flexibility in the future with these initiatives.

While RadioShack’s total sales declined marginally (0.5% y-o-y) driven by the impact of 2.5% fewer stores in the U.S., its comparable store sales grew by 1.3% annually. Comparable store sales increased for the first time since Q4 2012 as the company marked its sixth consecutive quarter of strong growth in its signature line of products.

We have yet to see any significant gains from RadioShack’s turnaround strategy. The company claims that it will take several quarters of strategic changes to improve its long-term financial performance.

See our full analysis for RadioShack

Segment-Wise Results – Consumer Electronics Was The Worst Hit

Strong demand for wireless accessories, portable speakers and AC adapters in RadioShack’s U.S. company related stores led to 4.6% and 6.4% growth in its signature platform’s total sales and comparable store sales, respectively. Within the mobility platform, the company saw double-digit growth in its prepaid business as consumers responded to the expanded assortment of smartphones and the value of the prepaid model. However, gains from higher prepaid sales were offset by soft consumer demand for postpaid phones, in turn lowering RadioShack’s mobility revenues by 0.9% y-o-y.

Registering a 9.8% and 11.3% y-o-y decline in comparable store sales and total sales, respectively, RadioShack’s consumer electronics business was the worst hit in the quarter. In addition to macro factors, RadioShack’s strategy to deemphasize laptop computers, MP3 players and GPS devices from its portfolio contributed to lower sales of these products.

Gross Profit Will Remain Under Pressure

RadioShack’s gross margins have declined from 45.4% in 2008 to 36.7% in 2012. The company has been betting big on shifting its focus to mobility devices like smartphones, an area which is expanding fast but offers comparatively lower margins. Its revenue contribution from the mobility division has risen from 44.2% in 2010 to 51.4% and 53.1% in 2011 and 2012, respectively. In Q2 2013, RadioShack’s initiative to move through unproductive inventory and test new promotional vehicles put additional pressure on its gross margins.

On the positive side, RadioShack is seeing stable margins in its high-margin signature business and improving margins in the consumer electronics business. As the company focuses on revamping its product assortment and reposition its brand, additional sales volumes can help stabilize margins. However, since RadioShack derives a majority of revenues from the wireless segment, we expect margins to remain under pressure for the rest of our review period.

Some Recent Steps Taken By RadioShack To Turn Around Its Business

1. New Strategic Partnerships: As part of its turnaround strategy, RadioShack has entered into a strategic partnership with two players – Maker Media and NASCORP. With Maker Media it aims to reestablish its brand to go after the younger demographic and the Do-It-Yourself (DIY) customer segment. The latter became disenchanted with the company following the 2009 re-positioning exercise by the chain and largely abandoned it.

Partnering with NASCORP, a wholesale distributor and service provider for nearly 4,000 college bookstores, opens an opportunity for RadioShack to enter a non-traditional marketplace. The affiliated colleges will install RadioShack-branded fixtures in their campus bookstores which will be stocked with some of the company’s popular items.

2. Revamping Product Assortment: In Q2 2013, RadioShack worked towards removing duplicate inventory and unproductive inventory through promotions and clearance events. The company claims that it has identified those SKUs that drive demand in a given store’s trade zone so that it can customize the assortment and focus the inventory on products that generate the majority of its sales and profits. The company is also rationalizing the number of private brands in its portfolio.

3. Concept Stores: RadioShack opened its first concept store in Manhattan with an aim to reinvigorate its store experience. It has 10 locations currently under construction and will have a few more that will open by the year end.

RadioShack also plans to work towards more visible advertising and promotion of the RadioShack brand on new-age media platforms and revamped stores which will emphasize its interactive experience.

We are in the process of updating our price estimate of $3.20 for RadioShack.

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