RadioShack: Hopes That New Products & Initiatives Can Lift The Mobility Business

RadioShack (NYSE:RSH), which has been a prominent player in the electronics retail business for over 90 years, has been struggling to survive in the industry with rising competition from online retail giants such as Amazon (NASDAQ:AMZN), online auction sites like eBay (NASDAQ:EBAY), as well as other physical retailers such as Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT). In the last few years, RadioShack has been plagued by an eroding top line growth, declining gross margins, high inventory levels, a string of debt maturities and declining cash reserves. The company reported its tenth consecutive quarterly loss in Q2 2014 last week.

Though RadioShack claims to be making steady progress with its turnaround initiatives (which were implemented last year), it has failed to show any significant financial gains so far. Radioshack’s stock price has declined by approximately 300% in the last one year and the company faces threat of being delisted  from NYSE. In its Q2 2014 earnings call, Radioshack admitted that the current pace of its turnaround is simply not fast enough to address the company’s near term liquidity needs. It is actively exploring options for restructuring its balance sheet and is in advance discussions with a number of parties.

RadioShack is in the process of working with its key financial shareholders to make significant reductions in its cost structure in order to provide the additional liquidity and time necessary to see the effect of its turnaround strategy. The company is doing everything it can to avoid bankruptcy. Its cash and cash equivalent is down to around $30 million and it is trying to secure a $585 million financing package, led by UBS and the hedge fund Standard General LP. ^[1]

Retail and mobility are the two key platforms that RadioShack uses to measure its business. The company claims to be making progress in its retail segment, which accounts for 50% of the sales. It is seeing customers responding positively to the key elements of its turnaround strategy such as the actions it has taken (so far) on reinvigorating the store experience, revamping product assortment and creating a stronger inventory position. However, RadioShack continues to suffer in the mobility segment which accounted for more than 75% of the decline in sales in Q2 2014.

Our price estimate of $0.86 for RadioShack is at an approximate 10% discount to the current market price.

See our full analysis for RadioShack

Mobility Business Suffers Due To Low Consumer Interest: New Products & Initiatives Can Spur Demand

Radioshack is witnessing fundamental challenges in its mobility business and is working hard to optimize profitable transactions in this segment. The mobility unit is suffering because of the low consumer interest in the current assortment of handsets, the aggressive promotional environment on these products and intense wireless carrier marketing activities. Customers have delayed purchasing or upgrading their phones, which in turn has led to further aggressive price competition on existing handsets among the wireless carriers and other retailers.

RadioShack claims to be addressing the above problems head-on by focusing on profitable sales. It is improving the technology it uses to sell mobile phones and bringing in new wireless offerings. The mobility market has been soft for a number of quarters, but Radioshack expects that new products from key vendors will spur demand in the future.

Some examples of Radioshack’s growing commitment to the mobile space are –

– RadioShack recently rolled out Sprint’s easy-pay program and Verizon’s Edge program, and it is working closely with AT&T to implement the AT&T Next program. These carrier financing programs provide the customer with more choices on how to pay for the handset and provide more flexibility on when they can update to the next generation handset.

– RadioShack will be the exclusive national retailer for Defense Mobile’s new nationwide 4G LTE mobile services, which will be offered to over 50 million members of the U.S. military community including those actively serving veterans and their family members. The launch is significant as the first ever mobility program which offers value-added exclusive discounts, content and other benefits for the military.

– The company has also entered into a new partnership with Trustev to use anti-fraud data fingerprinting technology at the point of sale to enhance the customer experience when buying a mobile phone. The Trustev service will allow RadioShack to quickly screen over 260 online customer data points, which significantly speeds up transaction time and allows the company to provide the most suitable mobile product and payment structure best suited for the customers credit profile.

– RadioShack has now become an Apple top five retailer and a best-in-class retailer for AppleCare and Apple branded accessories. In Q2 2014, RadioShack partnered with Apple to create an amplified Apple oriented retail experience in its stores in Cupertino. It plans on expanding the initiative to more stores.

RadioShack believes that its adjusted approach to mobility will make the segment an important contributor to its overall business going forward. Forecasting ~$3 billion in revenue for fiscal 2015 (ends with January), we are a bit above the consensus. Still, until we see concrete signs of a turnaround, we are unable to model much of an improvement in the company’s business.

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1. RadioShack Attack – And This One’s Looking Fatal, Fox Business, September 16, 2014 [↩]