Small Caps On The Move - Radio Shack

Feb. 6.14 | About: RadioShack Corporation (RSH)

If you happened to watch the commercials on Super Bowl Sunday, you would have seen some crazy stuff. Some were funny, some inspiring, but plenty that were clearly trying too hard to impress.

One that caught my eye, and was certainly one of the funniest (in my opinion), inspired me to check back in to see how the company has been fairing.

Welcome back Radio Shack (NYSE:RSH) …

Last year, I wrote a couple of articles on RSH, with the latest questioning why the stock doubled …

In the article I wrote that Radio Shack had seen a jump on nothing more than speculation and earnings were no indicator that the penny stock was investment grade material. I said it was all hype.

You can read the previous article here

If you want the cliff notes, basically earnings have continued to degrade at "The Shack". And that's left investors wondering how this massively debt-laden retail dinosaur can pull a turn around.

Back to the commercial …

I give kudos to RSH for owning up to the abundance of outdated stores. And under new management, the company is moving to give their stores a big makeover … they're clearly trying to keep our focus on this point.

But the problem isn't how pretty or new their stores are. The crux of the problem is there are plenty of other places to get exactly what Radio Shack sells both cheaper and faster. [Best Buy (NYSE:BBY), Amazon (NASDAQ:AMZN), Conn's (NASDAQ:CONN), etc.)

Even if RSH can leverage its brand name, seeing the company has been around since 1899, it seems unlikely they'll be able to bring their debt back to a manageable level while growing revenue.

And then there's the latest blow dealt to investors: 500 retail outlets were closed just this week. That's roughly 10% of their retail outlets!

What exactly is going on over at Radio Shack?

Well, as I told you previously, RSH has tons of debt (with a debt to equity ratio of 1.27x) and is experiencing very heavy EPS shrinkage. Quarter over quarter EPS fell a staggering 258%.

Per RSH management, they're trying to implement a 5-pronged restructuring approach. The plan includes redefining their brand, changing up product mix, refreshing stores, and attempting to regain financial flexibility.

Sunday's commercial touched on a few of those points. But certainly shutting down 10% of their retail footprint can't help to raise the question, how bad is RSH bleeding?

Unfortunately for investors, there's not much to look forward to until at least 2017 (the soonest analysts see RSH turning a profit). And with earnings coming out on February 24th, and the spate of retail earnings misses (remember- the almighty Amazon missed expectations) … you can bet there won't be much to cheer about.

Even as RSH continues to slide from last year's over-hyped rally, the bleeding for investors appears far from over. I'd go as far to say we'll see new 52-week lows and a break below $2 before the month is out.

In fact, it's my belief that Radio Shack has the potential to become a sub-$1 penny stock!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.