Lots of Static for RadioShack
By Tom Taulli, IPO Playbook
Any company that has “radio” in its name is a dinosaur. And this certainly applies to RadioShack (NYSE:RSH). It’s a good bet the stock will not live beyond 2013.
Over the years, the company has been struggling to find relevance. Most recently, mobile devices came to the fore. RadioShack struck deals to set up kiosks in retailers like Target (NYSE:TGT) and Walmart’s (NYSE:WMT) Sam’s Stores. Unfortunately, the deals turned out to be unprofitable and have been terminated.
RadioShack’s own chain of 4,700+ stores is also ailing. The properties are often in strip malls and have tiny footprints of only about 2,500 square feet. They also must compete against tough rivals, such as big-box retailers like Best Buy (NYSE:BBY). Of course, major carriers like AT&T (NYSE:T) and Verizon (NYSE:VZ) are also a factor. Oh, and we can’t forget a little company called Amazon (NASDAQ:AMZN).
While the mobile business continues to grow, the margins are getting squeezed. The major phone manufacturers such as Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) continue to extract better and better terms.
This trend has been horrible for RadioShack. In the latest quarter, revenues fell from $1.03 billion to $1 billion and comparable store sales were off by 1.6%. But gross profit margins fell from 43% to 36% during the past year. RadioShack blamed this on the “the mix of smartphones at a lower-margin rate.”
It’s true that RadioShack has $938 million in total liquidity, which includes $546 million in cash as well as $392 million in a credit line.
But as margins deteriorate — which seems inevitable — there will be more pressure on liquidity (in fact, the company has already been aggressively raising capital). It will also mean there will be fewer resources to transform the business model.
All in all, it is an extremely brutal environment for RadioShack. You can start the deathwatch now.
At the time of publication, Taulli had no positions in the securities mentioned.