RadioShack: This Is Your Second Warning
U.S. stocks managed to post their fourth consecutive winning day on Thursday for a perfect 4-0 record in an abbreviated trading week (financial markets are closed tomorrow in observance of Good Friday); in fact, it was stocks' best week since July. The benchmark S&P 500 rose 0.1% today, while the narrower Dow Jones Industrial Average fell 0.1%. Why the divergence between the two indexes? You can blame shares International Business Machines , which fell 3.3% today on disappointing first quarter results - they're the second heaviest weighting in the price-weighted Dow index.
In other company-specific news, shares of RadioShack were decimated after an article in the Wall Street Journal [sign-in may be required] highlighted its contentious relationship with its lenders, as the electronics retailer struggles to implement a plan to close 1,100 stores.
Let's put RadioShack's plan in context: 1,100 stores represents one-fourth of the company's total store base in the U.S., so this is a massive restructuring; although given the straits in which the company finds itself, it may well prove to be inadequate. As such, the company is forced to negotiate with its lenders to execute the plan - its credit agreements stipulate that it can only close up to approximately 200 stores without the approval of its lead lenders, Salus Capital Partners and GE Capital (a unit of General Electric).
When RadioShack first announced its store closure plan in early March, I warned investors to stay away from the stock, arguing that its distressed valuation was representative of genuine distress, not undervaluation. That day, March 4, the stock closed at $2.25; since then, the stock has never been higher than $2.33, even intraday. This afternoon, it closed at $1.41, down 31% on the week.
This is how I concluded my article in March:
According to the Wall Street consensus, investors will need to wait at least until 2016 for any glimmer of a profit (S&P Capital IQ only shows a consensus estimate as far out as 2015). What will the retailing environment look like then? In two years' time, do you think e-commerce will represent a smaller or larger proportion of retail in general, and electronics items specifically? It would not surprise me if RadioShack had filed for bankruptcy long before then. The company's announcement that it will close 1,100 stores does little to allay my concern. Ultimately, there is probably only room for one national electronics retailer in the U.S.; if that's the case, your best bet isn't RadioShack, it's Best Buy (which is itself no sure thing).
I don't see any reason to modify my view today. If anything, this most recent news compounds RadioShack's problems, and suggests a successful turnaround is even more remote than before. The stock may become some sort of momentum play, but I continue to think that fundamentally driven investors ought to avoid it. There are easier ways to earn an adequate risk-adjusted return in the stock market.
You can make money in retail with two stocks changing the retail world
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform, and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.
The article RadioShack: This Is Your Second Warning originally appeared on Fool.com.Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.