Is There Hope for RadioShack?

Is There Hope for RadioShack?

Small-format electronics retailer RadioShack is yet again priced for death. Sales continue to plunge by double digits, and the long-term bears are feeling especially prescient in this latest instance of a former heavy-hitter retailer finding the modern consumer shopping environment to be nearly non-navigable. The C-suite continues to see an influx and outflow of executives attempting to salvage the struggling business. CEO Joe Magnacca is hopeful, and his ideas appear to be trending well. But in the wake of the J.C. Penney debacle, a confident CEO and their turnaround efforts are not easy stories to sell to Wall Street. Is there hope for RadioShack?

Earnings pit
All around, RadioShack earnings cratered. Bottom-line earnings were deep in the red -- a loss of $112 million, or $1.11 per share. A year ago, the adjusted loss came in at $0.33 per share. The Street had been expecting a fraction of the loss -- $0.35 per share. Revenue fell less -- down just 10% year over year. Gross margin, however, contracted sharply as the company used aggressive discounting to rid itself of duplicate and unwanted merchandise. Same store sales slid more than 8%.

The market responded by sending shares sliding down into the double digits.

Investors and analysts were previously informed that the company's turnaround efforts would take several quarters to show up on the financial statements, but the early strategy of smartphone sales -- a method competitor Best Buy used effectively to help turn around the stores -- failed to juice store traffic or sales.

By any measure, RadioShack is not doing well. There is at least one bright spot, though, regarding the company's liquidity.

Cash to get you through
RadioShack was able to secure an $835 million loan from several providers that will give the company an easy path through the holiday season. CEO Magnacca needs cash to drive his vision of the new RadioShack -- renovated, easier to navigate "concept" stores, complete remerchandising, and a widespread "contemporizing" of the remaining stores. In management's comments, Magnacca said the concept stores showed same-store sales gains up in the double digits.

The last part is certainly encouraging, and deserves commendation considering the company is battling a more successful Best Buy and, of course, Amazon. It does, however, remind one of similar comments Ron Johnson made in the earlier days of the J.C. Penney turnaround.

Investors are going to need to see a fast rollout of these concept stores and material gains coming out of them. The big challenges remain for RadioShack, and as Amazon goes deeper into consumer electronics, the battle will only intensify. Magnacca and his executives will need to execute spot-on capital allocation coupled with some innovative merchandising practices. As a stock, it's a deep value play, and has been for some time. Still, wait for more evidence that the company can steer its way out, or for the price to go even lower.

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