RadioShack: Over and Out?

RadioShack is making valiant efforts to fight against current consumer trends, but unless it makes other bold and effective moves soon, it will be game over at some point over the next several years.

An interesting statement
In RadioShack's most recent 10-Q filing, it called the consumer electronics environment weak, and this played a role in the retailer's disastrous 13.8% year-over-year comps decline (comps refer to sales at stores open for at least one year).

If the consumer electronics environment is so weak, then why did Apple just deliver a second-quarter year-over-year revenue gain of 5%? Apple has seen revenue growth of 3.91% over the trailing 12 months as well as 303.7% growth over the past five years. In addition to that, Tim Cook, Apple's CEO, commented, "We're very proud of our quarterly results, especially our strong iPhone sales and record revenue from services."

Of course, RadioShack isn't Apple, and it's a different type of business, but both companies target the consumer electronics market, and this proves that strong companies like Apple, that possess, among other things, a sticky ecosystem that locks users into its strong brand, can buck industry trends. Weak companies like RadioShack, that mostly retail others gadgets with little value accruing to their bottom line, simply cannot. RadioShack's troubles don't end there.

Additional headwinds
RadioShack had been relying on postpaid and prepaid handset sales to help fuel its revenue growth, but wireless carriers have stolen share by offering financing programs to consumers. RadioShack cannot compete with these aggressive promotions, and it's facing price competition on most fronts. When you combine these factors with weak foot traffic and a decline in average ticket due to poor mobility (handset) sales, you end up with a 13.8% comps decline.

The price competition in handset offerings also greatly affected gross profit, which declined to 36.5% of net sales versus 40.2% of net sales in the year-ago quarter. And the first-quarter loss from continuing operations came in at $98.3 million versus $23.3 million in the year-ago quarter.

RadioShack plans on closing up to 200 stores as part of its plan for reducing expenses. In the first quarter, its total store count was 5,420, down from 5,580 in the year-ago quarter. Though this wasn't a big reduction, this should have aided RadioShack's efficiency (revenue growth versus growth in selling, general, and administrative expenses) in at least a small manner, but that doesn't appear to be the case.

RSH Revenue (TTM) Chart

RSH Revenue (TTM) data by YCharts

Yes, RadioShack is reducing its expenses, but revenue is declining at a much faster pace. RadioShack does have a plan to turn its beaten and battered ship around, but will it work?

Five pillars
The following are the five pillars of RadioShack's turnaround plan: reposition the brand, revamp product assortment, reinvigorate the store experience, operational efficiency, and financial flexibility.

As far as repositioning the brand, the best way to accomplish this goal is via marketing. RadioShack did have a highly memorable commercial during the Super Bowl, but it didn't translate into increased sales. If that doesn't work, what will?

In regard to revamping the product assortment, RadioShack has established new partnerships with Quirky (an investment company that allows regular people to submit their ideas) and PCH International (a hardware manufacturer). Here's where it gets interesting.

By taking this approach, RadioShack has the potential to go from an antiquated retailer to a store that offers something fresh and exciting. The PCH deal could encourage hardware entrepreneurs to sell their products at retail. The "Powered by PCH" areas are expected to roll out in 2,000 RadioShack stores over the next few months.

To reinvigorate the store experience, RadioShack will rely on consumers visiting RadioShack for its knowledgeable employees. This isn't likely to be an effective initiative. In today's world, consumers are highly educated on electronics, and in some cases, consumers can educate RadioShack employees.

To help stem the tide in profits, RadioShack plans on reducing its headcount, leveraging its technology, and reducing its discretionary expenses going forward. This should indeed help reduce expenses, but this won't mean much without revenue growth.

For financial flexibility, RadioShack's free cash flow and debt-to-equity ratio haven't been heading in the right directions over the long haul, which of course hasn't boded well for shareholders.

RSH Debt to Equity Ratio (Annual) Chart

RSH Debt to Equity Ratio (Annual) data by YCharts

The Foolish conclusion
While a shot at a turnaround might excite some investors given the chance for astronomical gains, you should strongly consider sticking with companies that are efficient, consistently generating free cash flow, and offer strong future potential with limited risk. RadioShack doesn't fall into that category. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

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