The good news is RadioShack (NYSE:RSH) can and will sell assets and close stores if it needs to shore up waning liquidity. The bad news is, that’s the only good news for the struggling electronics retailer (and even that good news is a bit dubious).
A dwindling cash reserve is only a symptom of RadioShack’s bigger challenges right now. If the retailer is to have any hope of a long-term fix for its cash issues, it’s going to have to address a number of structural and competitive issues.
By the Numbers
Just for perspective, the $313 million company is sitting on $536 million in cash or cash equivalents. Those two numbers alone imply the share price should be considerably higher, if for no other reason than the cash value of each of those shares.
As they say, though, there’s more to the story.
Last year, RadioShack took a $139 million loss. Granted, on an operating basis, the company only booked about $47 million in losses. However, against a backdrop of fading free cash flow (the company’s one historic claim to fame), a drastic 7% dip in same-store sales for the fourth quarter, and company debt swelling from $670 million to $777 million in 2012, the red flags are waving. More cash won’t stop any of that bleeding. Indeed, axing stores — even ones causing losses — won’t necessarily cure the ill here.
What’s Going On?
Put the historic math aside for a moment and take a step back.
The best way for any company to maintain and grow liquidity is to grow sales and increase margins. (Yes, it’s obvious, but it’s also easier said than done.) If RadioShack is serious about an improved balance sheet, it will need to start on the profitable-revenue front, with the following:
- Cheaper competition: Twenty years ago, RadioShack was the go-to source for electronics equipment. Granted, it was catering to a very select market, but it had little competition in its target market. Aiming for a broader audience, though, the company morphed into something a little more mainstream, bringing toys, mobile phones, televisions and now tablets into the mix. Problem: Walmart (NYSE:WMT), Amazon.com (NASDAQ:AMZN), Best Buy (NYSE:BBY) and about a zillion other retailers offer the same merchandise, and offer most of it at a better price. To be fair, the need for parts and specialty electronics has faded, so the company needed to make some sort of change to its mix of merchandise. However, you just can’t compete with Amazon’s and Walmart’s pricing if you’re selling the exact same items.
- Lack of focus: As BB&T analyst Anthony Chukumba so poignantly asked, “Why is RadioShack in business?” (He couldn’t offer an answer.) The transition away from specialty electronics and toward a larger menu aimed at any and all consumers has also meant consumers can’t differentiate between RadioShack and Best Buy, or between RadioShack and Walmart. That’s the nice way of saying RadioShack doesn’t bring any particular expertise or knowledge to the table the way it used to.
- Too much emphasis on mobile: In some ways, the effort to further penetrate the mobile market is an extension of the “lack of focus” challenge. In other ways, though, it deserves its own look if only because it was the straw that broke the camel’s back. Mobile phones and mobile service are a huge business, creating billions and billions of dollars in revenue every year. The Verizon (NYSE:VZ) wireless unit, for instance, generated about $80 billion in wireless revenue last year. About half of the revenue driven by AT&T (NYSE:T) comes from wireless customers. That’s more than a $60 billion contribution to AT&T’s top line last year. Wireless margins, however, are tiny, and they don’t get any bigger for resellers and middlemen like RadioShack. In fact, one has to wonder if RadioShack’s effort to go up against the Verizons and AT&Ts — facing off against the service providers themselves on the retail front — ended up hurting the company more than helping the top or bottom line.
All three of those pitfalls can be unwound. But you’re talking about undoing years’ of work taken on specifically to make the company more broadly focused on the average consumer. Refocusing now will cost time and money, and such a movement would likely hit the “well, we’ve never done it like this before” wall. (Even if they have done it like that before, most existing employees probably weren’t around back then.)
Can It Happen?
Anything’s possible, but those hurdles aren’t low for a company that’s been set too long in its ways, with its current product lineup, in its current markets, with its current customer experience.
Barring a miracle, the RadioShack we know and love today likely won’t exist in 2015.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.