Best Buy Vs. RadioShack: Which One Will Fail First?

Inside A Best Buy Store Ahead of Earnings Figures
David Paul Morris/Bloomberg/Getty Images

Tuesday was a day of extremes for investors of consumer electronics retailers. Shares of Best Buy (BBY) plunged 7 percent after posting disappointing quarterly results. That contrasted sharply with shares of RadioShack (RSH), which soared 19 percent on reports that a shareholder rescue package was in the works.

We can't judge the fate of two meandering chains on a single trading day. After all, Best Buy may have let the market down by posting weaker-than-expected sales, but at least it's not the one hoping that a "rescue package" will save it from bankruptcy.

Anytime a stock appreciates by a fifth of its value on anything with the words "rescue" and "package," you know there's a fairly good chance that it's not going to end well.

Best Buy Is the Better Buy

There's no denying that Best Buy is in a funk. Sales declined 4 percent to $8.896 billion, fueled by another quarter of shrinking comparable-store sales. The consumer electronics superstore chain sees the weakness continuing. It sees negative comps continuing through at least the next two quarters.

Consumer appetite has been weak in general. Tablet sales have been cooling off, and Best Buy points out that the smartphone market has stalled ahead of the iPhone 6 hitting the market. Apple's (AAPL) new smartphone should be unveiled at some point next month, but it's doubtful that will be enough to light a fire under the mobile handset market. Apple updates the iPhone every year, and none of those upgrades have been enough to save Best Buy over the past two years of sliding sales.

However, unlike RadioShack, Best Buy is still profitable. In fact, its adjusted earnings actually climbed in its latest quarter. The retailer has been successful in shaving its overhead to the point where it can grow its bottom line despite coming up short on top. It's a trick that Best Buy can't keep performing forever. Sooner or later it's going to have to find a way to get shoppers to come back. However, for now Best Buy is earning more than enough to cover its quarterly dividend.

Thinking Outside the Small Box

Things are going far worse at RadioShack. Forget dividends: RadioShack paid out its last dividend more than two years ago. Forget earnings: RadioShack hasn't been profitable since 2011.

The iPhone 6 won't save RadioShack. It's been profitless through the last two generations of Apple hardware. RadioShack's lack of earnings coincides with when it decided to emphasize mobile products and services a couple of years ago. It was right to do so; mobile usage has been a growth industry. Unfortunately for RadioShack, smartphone shoppers just aren't buying their Android and iPhone handsets at its stores.

Same-store sales plunged 14 percent in its most recently reported quarter, and deficits are widening. RadioShack is closing stores. It's attempting to remodel its remaining stores, but that doesn't come cheap. With $615.4 million in debt and its stock trading for pocket change, it seems as if RadioShack is on borrowed time.

This brings us to Tuesday's report. Sources tell Bloomberg that RadioShack's second-largest investor is trying to spare RadioShack from filing for bankruptcy. It's looking to issue debt or equity to help improve the chain's liquidity. Then again, access to capital isn't as relevant as the company's past few years of destroying it.

So where should investors be? Best Buy is bad, but RadioShack is worse. Best Buy is a stock where investors need to weigh the serious challenges it faces to start growing again. RadioShack at this point is more a speculation than an investment.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days.