by Marc Bastow | May 2, 2012 7:30 am
If you are old like some of us, you probably remember strolling into the local RadioShack (NYSE:RSH) to pick up some batteries for your clock radio, check out the newest electronic gadgets and games (like, say, Pong) and see if the store manager would let you drive around the really cool electronically controlled Mustang.
Those days are gone.
Today’s RadioShack is a forgotten retail outlet in the back corner of a strip mall, or at the sad end of a corridor in a mall shoehorned between a Lady Foot Locker (NYSE:FL) and Hallmark store.
So what do investors think of this stock, which has plummeted from almost $35 a share in 2007 to a mere $5 a share now? Well, RadioShack is either nearing the end of its rope or on the cusp of a rebound, depending on how you view its decade-low price and 9.6% dividend yield.
After looking around the landscape of the electronics universe and seeing no future in its 4,000 retail outlet model, RadioShack made the decision in 2009 to go virtually all-in based on a “mobility” business model.
The model relies heavily on “Target Mobility,” which is an agreement with Target (NYSE:TGT) to allow RadioShack to run Target’s in-store electronics and mobile phone operations, including the sales and servicing for Tier I carriers T-Mobile, Sprint (NYSE:S), AT&T (NYSE:T) and Verizon (NYSE:VZ).
RadioShack’s “store within a store” model is now up and running in 1,500 Target stores, and is the future of a company that must compete against Amazon (NASDAQ:AMZN), Best Buy (NYSE:BBY), who is enduring struggles of its own, Wal-Mart (NYSE:WMT), GameStop (NYSE:GME), Barnes & Noble (NYSE:BKS) and anyone else who can sell or service video games, mobile phones, Nooks, Kindles, iPads and iPods.
The changeover has virtually crippled RadioShack financially, and the question remains as to whether or not it can outlast the changes.
It’s worth noting that full-year revenues have increased since 2009, reflecting the addition of new Target Mobile locations in each year. But the additional revenues offset lower sales in company-run retail outlets, which are now outdated and often unprofitable. And then there has been the dividend and buyback plans meant to appease shareholders.
These strategic changes have not come without difficulty and, more importantly, high costs.
Newly appointed CEO James F. Gooch, already under scrutiny for his $5.9 million pay package, has overseen an increase in the company dividend to 50 cents per year, paid quarterly, from 25 cents per share paid annually. Additionally, the company is in the middle of an aggressive share repurchase program started in 2010, with $200 million set aside for 2012.
Add $80 million of capital expenditures to the list of cash outlays, and RadioShack had to come up with nearly $238 million in cash flow to pay the bills, with more on the way in 2012.
With just over $500 million in cash, it’s time to borrow — which RadioShack did through a $325 million private note placement that will cost the company to the tune of 6.75% semi-annually. That’s nearly $22 million a year through 2019.
An early indication of the struggles ahead lies in RadioShack’s first-quarter earnings report. Numbers showed lower sales due to online competition and discounting by the mobile carriers, but perhaps more importantly, an unexpected loss of 8 cents per share. That was well below analyst expectations of a 4-cent profit, and woefully behind last year’s 33 cents, reflecting increased costs.
The old RadioShack, an iconic name from an earlier age of electronics retailing, is waning. The only question remaining is if it can power up long enough to survive into a newer age.
Marc Bastow is an assistant editor of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.
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