RadioShack’s (NYSE:RSH) stock price declined by more than 20% during intra-day trading on July 11, as news hit the market that the company is on the lookout for a financial adviser to help fix its balance sheet. 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. Witnessing eroding top line growth and declining gross margins, RadioShack has been posting net losses in the last five quarters. Facing high inventory levels, a string of debt maturities and declining cash reserves, it has been forced to close many outlets and lay off thousands of employees.
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At the end of Q1 2013, RadioShack had total liquidity of $820 million, including cash and cash equivalent of $435 million, and $385 million of asset-based revolving credit facility that expires in January 2016, and $712 million short term and long term debt.
Our price estimate of $3.20 for RadioShack is now at a premium of over 20% to the current market price. In this article we discuss the key challenges faced by the company and some recent steps taken by it to turnaround its business.
What Are The Challenges Faced By RadioShack?
Listed below are some important factors that have negatively impacted RadioShack’s business in the recent years:
1. Challenges faced by the consumer electronics retailing industry
RadioShack not only competes with other physical retailers such as Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT) but also faces intense competition from online retailers like Amazon (NASDAQ:AMZN) and online auction sites like eBay (NASDAQ:EBAY). The entry of online retail giants has altered the landscape for the consumer electronics market. 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, Best Buy (NYSE:BBY) announced making its price-matching policy permanent in order to put an end to showrooming. 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.
However, RadioShack can benefit from the “Marketplace Fairness Act” which has made it through the Senate. The bill is designed to bring online retailers under the sales tax purview to give physical retailers a level playing field and will now be discussed by the House of Representatives.
2. Focus on the wireless business has put pressure on gross margins
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. 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.
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 continuous improvement in the macro environment can help increase demand for these products in the future.
Steps Taken By RadioShack To Turnaround Its Business
With a new CEO in place, RadioShack has been working on devising a new strategy to turnaround its business since the last few months. The main focus of its initiatives is on re-branding the chain and re-defining what it stands for. The company is making an effort to go after the younger demographic and the Do-It-Yourself (DIY) customer segment. The latter became disenchanted with RadioShack following the 2009 re-positioning exercise by the chain and has largely abandoned it. In addition to making changes to its store inventory, appearance and signage, it is airing commercials aimed specifically to lure the younger audience.
Read more about RadioShack’s recent initiatives to revive its business in our article: What’s RadioShack Doing To Revamp Its Image And Stock?