By Neal Rau
RadioShack Corporation (NYSE:RSH) has been a troubled company in recent years, and RadioShack's $96 million loss during the first half of 2013 was more than triple the prior-year period's loss. The company's new CEO, which is the fourth in the last 3 years, is working to turn the business around like its rival Best Buy Co., Inc. (NYSE:BBY) was able to do this year. Shares of RadioShack are up 84% YTD, but still down over 58% from where the stock traded in Jan of 2012. Should investors be buying or selling shares at current levels?
Recent rumors have been suggesting that RadioShack is looking to raise some cash as it recently said it would be reducing stocked items at stores from 4,000 to 3,000, which is a tactic often used by retailers to raise cash. The stock trades around $4.00, but it has $4.33 in cash per share on the balance sheet. Its debt, however, is a concern, with nearly $7.20 per share in debt. The new CEO just brought in a new interim CFO and investment banker in what many are speculating is a move to refinance the company's debt and raise liquidity. RadioShack leases most of its retail store property, which means the company owns little real estate, and therefore does not offer much security to potential lenders. Rumors have suggested the company is looking to secure a deal as early as October. The stock has been moving mostly on rumors and speculation about the potential refinancing of debt. Even if RadioShack can get a deal done, the company still has to figure out a way to deal with its biggest competitor, Amazon.com, Inc. (NASDAQ:AMZN).
The growing popularity of online retail has obviously hurt companies like RadioShack and Staples, Inc. (NASDAQ:SPLS), which makes the recent Amazon lockers deal even more puzzling. The program allowed Amazon customers to pick up online deliveries from other retail locations. Amazon somehow sold both companies on the concept that Amazon Lockers would actually help drive the two chains' business. As Amazon's customers would be entering their stores to pick up their online-purchased merchandise, and because they were in the store, might be tempted to make an impulse buy. A RadioShack spokesperson recently said the retailer had halted the program because it did not fit with its strategy.
Competing with Amazon is not the only hurdle RadioShack is facing as the company needs to find a way to diversify its products. RadioShack gets around 50% of its revenue from the smartphone market. ComScore believes that 60% of Americans already have a smartphone, and as a result, smartphones are likely to go down in price. Continuing to focus on low-margin smartphones could put further downward pressure on margins. RadioShack operating margin went from 7.6% in 2008 to -2.7% over the past 12 months. Although we have not heard much about diversifying products, the company is working on improving the retail stores themselves.
RadioShack just opened some new concept stores, which are designed to give its stores a fresh look and help reposition its brand. The company opened its third high-touch store on Long Island on August 3. The stores feature a new speaker wall and other interactive areas designed to help shoppers experience technology first hand.
Despite all the challenges RadioShack has been facing, the company has seen some insiders who believed the stock was a good buy, as evidenced by purchases made in late July and early August. Eugene Lockhart bought 5,000 shares at $2.67, which was a transaction of $13,347.50. Robert E. Abernathy however really stuck his neck out and bought 100,000 shares at $2.55, which was a $255,010.60 transaction.
The stock is currently trading around $4 per share, and up of over 50% from where Abernathy bought shares near support. The stock has made a nice run over the past 6 weeks, but that does not mean the stock will continue to climb from here. If the stock tests resistance, and remains below resistance, as defined in our real time trading report, we expect lower levels and a test of support. That would make RSH a sell/short at resistance, with risk controls in place if resistance breaks higher.