Will A New CEO Solve RadioShack’s Problems?

by Trefis Team
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RadioShack (NYSE:RSH) announced that its Chief Executive Officer, James F. Gooch, is stepping down after 16 months on the job. The company board decided that the time was right to make this decision. It felt that Gooch was not the right person to be in-charge in the current environment mired with several challenges. 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.

The management is now keen to put in place the right leadership to address the company’s challenges and capitalize on its opportunities. Chief Financial Officer Dorvin Lively has been chosen to step in as acting CEO until the company names a permanent successor. Lively has been a finance veteran for retail and consumer-products companies and joined RadioShack in August 2011 from Ace Hardware Corporation. The board plans to use an executive search firm to help find a successor to Gooch. [1]

See our full analysis for RadioShack

What Has Gone Wrong With RadioShack?

There has been a significant decline in TV and computer sales over the past couple of years as consumers are more inclined to buy smaller gadgets like mobile phones, tablets and e-readers. Sales for the latter category are higher than for other gadgets. Thus, RadioShack has focused its growth strategy on selling more expensive tablets and smartphones, which benefit from stronger demand.

The flip side to this strategy is that it faces fierce competition from online retailers as well as wireless carriers, whom it relies on as partners. This not only eats into its sales, but also forces it to lower profit margins. Apple’s (NASDAQ:AAPL) iPhone is a prominent example of a device that RadioShack is forced to sell at a lower margin.

The company is also facing increasing competition from Best Buy (NYSE:BBY), which has shifted its focus to operating small-format stores dedicated to selling mobile phones, e-readers and tablets. Best Buy is concentrating on opening these stores in strip malls, which have traditionally been RadioShack strongholds. To add to its misery, RadioShack suffers from the problem of a dated image. Best Buy, in contrast, is keen on setting up modern stores that would help it attract leasing agents. It has trained its salesmen to be smart and show customers how gadgets work together. These contribute toward a better customer experience and will help Best Buy gain an upper hand over RadioShack. ((Best Buy Takes on RadioShack in Mobile Strip-Mall Push: Retail, Bloomberg))

There has been a drastic change in the way consumers shop today. Revenues of brick and mortar retailers like Best Buy and RadioShack are being adversely affected as customers visit the stores to browse through products and eventually buy them online at cheaper prices — a phenomenon known as showrooming. We think that Best Buy may be able to mitigate the adverse effects of changing consumer preferences by offering better consumer experience and after-sales service in the mobile devices segment, as explained above. However, to expect the same from RadioShack is a tall order since it is not known for such services.

RadioShack suspended its dividend in July after posting an unexpected loss amid sluggish consumer spending and increasing dependence on mobile phone sales. The shift within mobility sales toward lower margin smartphones was the main driver behind declining margins.

We believe declining gross margins will remain a significant issue for RadioShack. Excluding the postpaid wireless business, the gross margin rate for RadioShack has remained flat. We have revised our estimate for RadioShack’s gross margins and expect them to witness a decline of 1% in 2012. It is difficult to be optimistic about gross margins at this point as there seems to be no concrete plan in place to counter the downhill slide. [2]. You can see the effect of gross margins on the company’s Trefis price using our interactive chart below:

We have a Trefis price estimate of $3 for RadioShack, which is at a 20% premium to the current market price owing to the sharp decline witnessed on Tuesday after S&P Dow Jones Indices booted RadioShack from its midcap index, citing the company’s small market capitalization.

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

  1. RadioShack CEO Departs After a Year, WSJ []
  2. RadioShack Needs Big Changes To Fight Negative Trend, Trefis []
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  • commented 4 years ago
  • RSH has a change, but only if they get someone who has PROVEN successful RETAIL skillsets in management and operations. If the DOB goes back to a CEO who, like Julian Day and Jim Gooch, doesn't know his head from his ass about running a retail company, then RSH will go bankrupt.
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  • commented 5 years ago
  • I worked for Radioshack for many years. There first problem is they hired people from a Company that was sinking and made them DM's without them even knowing what products Radioshack carried, 2nd they believe selling Wireless Phones is the answer, 3rd there staff is no longer knowledgeable. They have forgotten the people that actually loved shopping there for parts and knowledge. Those were the people that bought small one day and come back another to buy something big because they felt the person behind the counter was honest and sincere. You don't get that now so it is much easier for me to shop on line at Amazon or other places. Your not looking for real knowledge there.
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  • commented 5 years ago
  • Years ago I worked at a Radioshack in northern California. Even back then we were told push the larger electronics. But even back then the real money maker was patch cords connectors lights and other electronic components. Today if you want any of those items the internet is the only way to find it. Try adding that to the items that Radioshack today and it might help pickup a little extra money. Also try hiring somebody with a little background in what you sell and you might get a repeat customer.
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  • commented 5 years ago
  • Radio Shack needs to partner with ThinkGeek and get some of their "cool" products in the store, give us back erector sets and crazy chemistry sets, keep the phones but put things on those shelves people want to see and play with, they would do better on margins simply carrying RC model's and parts than what they are doing now.