Technology Retailing: Best Buy and... Radio Shack?

by: Marc Gerstein

Warren Buffett and Charlie Munger. Michael Jordan and Scotty Pippen. Babe Ruth and Lou Gherig. Bud Abbott and Lou Costello. Lucille Ball and Desi Arnaz. WalMart (NYSE:WMT) and Target (NYSE:TGT). Ralph Kramden and Ed Norton.

Do you notice how often success stories involve pairs? It’s not always necessary that both parties be equally proficient, though in many areas of life, it definitely helps. That’s especially so in the world of business, where we value choice, or in the language of antitrust jurisprudence, competition.

Best Buy vs. Who?

In technology retailing, we’ve had Best Buy (NYSE:BBY) and Circuit City, or if we confine ourselves to computers, Bestt Buy and CompUSA. Unfortunately for lovers of variety, CompUSA is just a shadow of its former self, and Circuit City left the scene, as have others before it.

Even so, it isn’t quite a matter of BBY having a 100 percent market share.

There are local rivals all over the place (in the New York City region, for instance, we have P.C. Richard, J&R Music World, and Micro Center). But being smaller, these merchants aren’t nearly as accessible as BBY, often even to people who live in parts of the regions where they operate. (New York area readers: Do you know where Micro Center is?)

There are also the general mega-merchants: Wal Mart (WMT), Costco (NASDAQ:COST), etc. who are striving for a bigger piece of the consumer technology pie. But no matter how you slice it, spending big bucks for a new laptop or a high-definition TV isn’t the same when you have to wait on line behind people paying for socks, eggs, laundry detergent, underwear, etc. and may possibly, have had to ask questions of sales people who may or may not have recently worked in those departments.

Bottom line: Right now, we seem to have a void. We may need a serious, focused, nationally-present competitor for Best Buy.

Speaking for myself and doing my Peter Lync-style evaluation of the scene (i.e., use what you know from real life to assist in forming opinions regarding stocks), I can see where the absence of a major rival may be having an impact on BBY. At least four times in the past six months I walked into a Best Buy, fully armed with credit cards and an intention to spend many hundreds of dollars on specific products, only to walk out empty-handed because of frustration in trying to deal with the sales staff. (Weren’t they supposed to be so much better at this than Circuit City? Didn’t I once start going to Best Buy for computers because I couldn’t stand dealing with the staff at CompUSA?)

I’m not sure how much generalization is justified based on my own experiences. But either way, the idea of a single competitor in a normally competitive market does seem at odds with our general expectations. So it does seem reasonable to wonder who will step up to become a serious national competitor for Best Buy.

It may be a complete newcomer. But let’s face, it: Would you want to try to raise capital to build a Best Buy rival, from the ground up, in this environment? And even if we fast forward a year or so down the road, we may continue to deal with a situation in which consumers are less quick with the plastic than had been the case in the past decade or so.

For this reason, I suspect Best Buy’s new rival, assuming we get one, will be someone who already exists. Wal-Mart, Costco and the like have to be serious candidates. So, too, does (NASDAQ:AMZN), assuming we’re willing to see e-tailing as a direct one-on-one competitor for a chain that can sell on line or through brick-and-mortar.

But if I really want to stick to the idea of a nationally present consumer technology specialist, I’m wondering if Radio Shack (NYSE:RSH) can step up and fill the void.

Are you laughing?

Seriously . . . are you? That’s OK. Radio Shack isn’t exactly a feared and admired retailing powerhouse right now. But I covered Best Buy as an analyst when it, too, was scorned (actually, that’s why I covered it; the senior retailing analyst didn’t want to waste his time with junk).

That was way back in the 1980s. CompUSA was king of computers. Its shares drove relentlessly upward as analysts fell all over themselves to see who could praise it most eloquently. Meanwhile, shares of badly struggling Best Buy were selling in low single-digit levels and the company was desperately trying to reinvent itself in order to survive. Nevertheless, I saw some things I liked (including its entrée into the pc arena) and tried to talk of it to the top portfolio manager at the company for which I then worked. But he was completely in love with CompUSA, sky-high valuation and all. At the mention of Best Buy, he just laughed and walked away.

Thinking about Radio Shack

I definitely would not now say Radio Shack has its act together. Product selection and availability and sales staff quality still need work, and prices seem higher than at Best Buy. I’m not going to get carried away by the company’s recent strong earnings because a lot of that had to do with selling converter boxes that can be used to get digital signals onto analog TVs (we’ll be going all digital soon so there’s a one-time surge in demand for these converters). And I do wish cell phones (a brutally competitive product category) were a bit less prominent in the overall sales mix.

But these concerns relate to the here and now. There’s no assurance they’ll still be dominant, or even remembered, five to ten ears down the road (come to think of it, I can’t actually recall what it was that had Best Buy on the ropes back in the ‘80s).

Thinking in terms of positive potential, I note the following:

  1. Radio Shack is already out there and well known. That gives it a major leg up any potential newcomer, or even a regional outfit that wants to expand geographically.
  1. Radio Shack does have some positive branding. If you need a battery or a connector or a cable or something like that, where are you going to go? Are you going to travel to Best Buy, or hop down to the local Radio Shack?
  1. Where am I more likely to find a knowledgeable sales staff? A few years ago, I’d have easily pointed to Best Buy. Nowadays, I’m not so sure. Fr now, the contest may be a stalemate and if I were to look toward the future and predict a winner, I’d probably flip a coin.

There are also challenges for Radio Shack.

  1. Best Buy has Geek Squad. I don’t know if Radio Shack is considering or would consider something like that. I’m not even 100% sure it’s a game breaker. From my own experience, I’ve known people who have been unimpressed with their Geek Squad encounters, and I’ve personally had good luck, in terms of price and quality of service, finding help the old fashioned way (the Yellow Pages).
  1. Best Buy is big box while Radio Shack is little box. Obviously, there’s more choice at Best Buy. Actually, though, it was a vintage-1980s Best Buy executive who explained to me that a lot of choice wasn’t necessarily a great thing. One element of BBY’s early recovery was its decision to narrow its selection only to best-selling items. Could that sort of approach now work for Radio Shack? And my recent ill-fated encounters with Best Buy sales people do make me wonder if the latter now have to deal with more than they can effectively handle.
  1. Another aspect of size is the ability to use scale to offer lower prices. Can Radio Shack find a way to match Best Buy, or if not, offer enough convenience and service to motivate shoppers to avoid automatically running to the bottom price? (Actually, Best Buy needs to think this way as it faces the likes of Wal-Mart.)

Crunching some numbers

Figures 1 and 2 show analyses of Radio Shack and Best Buy based on a stock ranking system I created on (An explanation of the model and its performance record can be seen in an Appendix at the bottom of an article that can be accessed by clicking here.)

Figure 1 – Radio Shack (RSH)

Figure 2 – Best Buy (BBY)

I’m definitely taking some of Radio Shack’s most recent rankings with a grain of salt because of the previously-discussed impact of the analog-to-digital TV converter boxes. The surge in sales that resulted from this gave a nice boost to the EPS Growth category, which leans heavily on recent performance. Once it passes, as should be the case in the second half, I would expect this ranking to slide. But it’s not exactly as if BBY is speed racing its way to the top of the charts. It seems that RSH has plenty of room to stay more or less in line with BBY even if, or most likely, when, it’s EPS Growth scores drop.

Most important, though, is the credible showing Radio Shack has been making in most other categories. The financial strength ratings may surprise some, but there’s more there than debt ratios, which is where BBY is clearly superior. RSH has more debt, but it’s also holding onto a lot of the cash, which helps its cause.

We can pick apart numbers from here till doomsday, and it’s easy to assume that more often than not, BBY will fare better. But that’s not what this is about. It’s a comparison of selected items that have, over time, shown themselves to be well associated with strong relative share price performance.

Long ago I learned that a better company doesn’t always make for a better stock and at this moment, RSH may be the better stock. But even if one wants to assess investment merit differently, there is one point that would still seem to hold. These numbers suggest RSH may be closer to being in BBY’s league than many might realize, enough so that if it executes well over the next few years, it may legitimately become able to become Charlie Munger to BBY’s Warren Buffett.

Disclosure: No positions