You'd Best Buy Radio Shack

Includes: BBY, RSH
by: Parker Logan

Best Buy (NYSE:BBY) and Radio Shack (NYSE:RSH), two iconic retailers, two different strategies, and both in Mr. Market's penalty box. By size, Radio Shack is David and Best Buy, Goliath. Which one will succeed? Will both survive? Most importantly, which one can make you money?

At Radio Shack's current price of $2.40 per share, RSH has lost nearly 75% of its value YTD. Best Buy has not done much better, with a current price of $12.14 per share, it has lost over 47% YTD. Both stocks have been hammered and rumors of potential bankruptcy have emerged.

In this article, we will examine some important fundamental financial metrics, compare how each company stacks up against one another, and see if either company has short-term bankruptcy risk.

Key Profitability Metrics

Winner: Radio Shack takes 3 of 4 metrics
Radio Shack appears more profitable based on a higher Net Profit Margin (even with adjustments for BBY's discontinued operations), ROE, and ROA throughout the 6-year period. The main driver of Best Buy's superior ROTC is the less total debt used to return more operating profits.

Key Solvency Metrics

Winner: Best Buy takes 3 of 4 metrics
Best Buy appears to be the most solvent with higher multiples within Interest Coverage Ratio and Fixed Charge Ratio metrics. Since the economic downturn, both companies' solvency metrics have suffered dramatically though neither are in the danger zone. Although BBY may have won the category, it also had more dramatic swings in metrics. e.g. DFL increased 78% from 2008 to TTM VS RSH, a 12% increase. Whereas RSH was stable.

Key Liquidity Metrics

Winner: Radio Shack takes 3 of 4 metrics
Radio Shack appears to be more liquid based on the Current & Quick Ratio and most importantly, the Defensive Interval. RSH has enough cash to run the businesses for over 70 days VS. 20 days at Best Buy. However, Best buy does dominate the CCC metric producing cash 5x quicker than RSH. [It is important to note that RSH carries slow moving niche electronic components that BBY and others do not carry.] Both companies have positive CCCs, which is a positive signal and means that neither company needs to raise capital for working capital purposes.

Key Efficiency Metrics

Winner: Best Buy takes 5 of 5 metrics

This is the other category where Best Buy dominates. Radio Shack's significantly lower Inventory TO indicates slow moving inventory perhaps due to slow moving inventory and/or technological obsolescence. Peers in this similar sector have Inventory TOs close 7x like Best Buy. Radio Shack's lower Receivables TO also raises questions about the efficiency of the company's credit and collections procedures. Best Buy is more efficient in both and is similar to its peers.


Based on these metrics, the results are mixed with each company demonstrating its strengths. Best Buy dominates the Efficiency and Solvency metrics while Radio Shack is superior in Profitability and Liquidity. Best Buy and Radio Shack end up in a TIE.

Neither seems to be in bankruptcy trouble in the short term. Both have strong liquidity and solvency metrics. Profitability is not where we would like it but fundamentals are still strong.

BBY is currently trading at 20% premium to BV. RSH is trading at an astounding 60% discount to BV, which reminds me of Benjamin Graham's investment philosophy of buying a dollar for fifty cents.

A catalyst for share appreciation could come with management turnaround plans. BBY and RSH are both experiencing transitions in upper management. There is also a possibility that BBY founder, Richard Schulze, will buy out the company, which could be priced at a nice premium to its current price.

Radio Shack could see a positive catalyst once a new CEO is hired and a turnaround plan is unveiled. Currently, the CFO is serving as the interim-CEO.

Disclosure: I am long RSH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.