RadioShack (NYSE:RSH) has been a prominent player in the electronics retail business for over 90 years, but has been struggling to survive in the industry with rising competition from online retail giants such as Amazon (NASDAQ:AMZN), online auction sites like eBay (NASDAQ:EBAY), as well as other physical retailers such as Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT).
The company is witnessing an eroding top line growth, declining gross margins, high inventory levels, a string of debt maturities and declining cash reserves. Its turnaround initiative, which primarily focuses on re-branding the chain and re-defining what it stands for, has failed to show any significant financial gains so far. The company reported its eighth consecutive quarterly loss in Q4 2013 as its net loss widened to $191 million compared to $63.3 million in Q4 2012. Its total revenue declined from $4 billion in fiscal 2011 to $3.4 million in fiscal 2013.
RadioShack will report its Q1 2014 earnings on June 10. We do not expect the company to report any significant improvement in earnings. We will update our valuation after the Q1 2014 earnings release.
Declining Store Count
Consolidating its store base into fewer locations, while still maintaining a strong presence in each market, is one of RadioShack’s key initiative t0 turnaround its business. In its Q4 2013 earnings call, RadioShack announced its plan to close around 1,100 (almost 25% of its total store count) of its under-performing stores in the U.S. However, the company retracted its plan as it was unable to reach an agreement to do so with the lenders.  RadioShack’s current credit agreements reportedly allow it to close only about 200 stores without the approval of lead lenders Salus Capital Partners and GE Capital, a unit of General Electric Co.  The situation is contentious and lenders reportedly could seek at least a portion of the proceeds from any liquidation of closed-store inventories.
Stiff Competition & Higher Sales Of Lower Margin Products To Restrict Margin Growth
Radio Shack’s gross margins have declined from 43% in 2011 to 34% in 2013. A higher proportion of low margin products in its portfolio, price competition from other players in the market, and high promotional and re-branding costs are the primary factors negatively impacting RadioShack’s bottom line. It reported gross profit margin of 29.8% in Q4 2013. Excluding one-time items, gross margin stood at 30.8% as compared to 35.8% in Q4 2012. Gross margins were lower year over year due to significant discounts offered across categories, lower margins in the mobility business and inventory flow issues for higher margin items.
We expect RadioShack’s gross margin to remain stagnant over our review period. Below are some factors that restrict growth in gross margin -
- Higher sales of lower margin wireless product: RadioShack has been betting big on shifting its focus to mobility devices like smartphones and tablets, 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 52.4% in 2013.
- Competitive pressure can limit growth: The entry of online retail giants has altered the landscape for the consumer electronics market. Retailers like Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) 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. Price competition from other established players can restrict Radio Shack’s top line growth and if the company does end up offering lower prices it will have to take a hit on its gross margins. 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.Notes:
- RadioShack scales back planned store closings, stevenspointjournal.com May 9, 2014 [↩]
- WSJ: RadioShack Mired In Talks With Lenders Over Store-closure Plans, Nasdaq.com, April 16, 2014 [↩]