I wrote earlier this month that Joe Magnacca is making many of the right moves at RadioShack (RSH). He brought in restructuring expert Holly Etlin from AlixPartners and investment banking firm Peter J Solomon to raise financing. It is no secret that they are looking at ways to reduce expenses, improve the balance sheet and right size the company footprint. Just last week we learned that the company is talking to lenders about reducing their interest expenses by paying off their current lenders with new lower cost loans. We also learnt from this SEC filing and subsequent news release that William Nebes III, the EVP of Mexico Operations separated ("fired"?) from the company. This got me thinking. Is there more to RadioShack de Mexico than meets the eye? Stay with me on this. I will get to the "Mexico angle" very soon.
It is clear that Joe and Holly are making all the right moves. This includes a number of initiatives to improve the top and bottom lines from reducing interest expense (debt refinancing) and reducing SG&A (headcount reduction) to sales and margin growth (concept stores). I actually think Joe wants to make RadioShack a "growth story" and not a story about a struggling consumer electronics (CE) retailer thrashing about for survival.
All indications are that the new concept stores are being well received. If Joe can pull it off, people may actually start talking about RadioShack as a cool place to try and buy the latest gadgets. Apple (AAPL) has shown us that physical CE retailing is not dead and can in fact be very profitable if done right.
While reduction in interest expenses and SG&A are important and necessary, these moves may not give Joe and Holly the financial flexibility to restock the stores with fresh new inventory for the upcoming holiday season or to expand the concept store rollout. This is why I think that they might consider a joint venture (JV) or outright sale of RadioShack de Mexico. This move would bring in a substantial sum of money and could give Joe and Holly the additional financial flexibility they need to finish executing the concept store roll out here in the US. A JV would be going back full circle since the company bought out its JV partner in 2008 for $44.7 million. At that time, RadioShack de Mexico had 200 stores. Now RadioShack has 273 stores in Mexico.
The table below tells the story of two different Radio Shacks.
June 30, 2013
Number of company-operated stores in
As you can see, the number of company-operated stores in the US has been shrinking steadily from 4453 stores in 2008 to 4311 stores in 2013 (except for a slight uptick in 2009 and 2010). During the same period, the number of company-operated stores in Mexico has been growing steadily from 200 stores in 2008 to 273 stores in 2013. Many CEOs have come and gone but the Mexico operations have expanded steadily upward. Would the company have kept expanding in Mexico if the stores were not solidly profitable? I think not.
One might wonder why the company would sell all or part of a thriving and growing Mexico operation. This is a valid question. But given the current state of the company's balance sheet and cash burn, and given the company's focus on rolling out new trendy concept stores in the US, this might be a good way to generate some cash. The more I think about it, the more a JV makes sense as opposed to an outright sale. It would give the company much needed cash for the concept store roll out and inventory build for the holiday season, while at the same time continuing to maintain a stake in the Mexican growth story.
Or perhaps Peter J Solomon bank and Holly might advise Joe and the RSH board that an outright sale of the entire company is the way to go. Many names such as Best Buy (BBY), Google (GOOG) and Microsoft (MSFT) have been thrown up in the press as potential acquirers. But given Amazon's (AMZN) decision to support a sales tax and their yearlong experiment with locker pickup, Gina Chon and Maria Halkias suggest that Amazon may be the most likely candidate.
In any case, the fact remains that RadioShack has a number of options it can explore and Joe is a savvy retail merchant who can be counted on to do what is right for the company. However, a number of hedge funds and retail investors do not share my optimism. RadioShack is the 5th most shorted stock in the entire NYSE as a percentage of the float. This fact might actually provide a good reason to buy shares of RadioShack if you are a true contrarian with a bit of technical trading savvy. With 39.2% of total float having been sold short as of August 09, 2013, I believe that the odds are in favor of a short squeeze in the not too distant future.