- The slump in the consumer electronics market has almost ended all hopes of a RadioShack turnaround.
- High debt and poor cash flow should be enough to keep investors away from RadioShack.
- RadioShack is soon expected to run out of borrowing ability and this will prove to be the final nail in the coffin.
- Illegally underpaying employees highlights the messy condition of RadioShack.
- Investors shouldn't be tempted by RadioShack's low valuation as the company is closer to bankruptcy than it is to a turnaround.
In the last one year, shares of consumer electronics goods and services company RadioShack (NYSE:RSH) have fallen a catastrophic 73%. The stock's value has now fallen below $1, and it looks like it won't be long before RadioShack goes bust. Here are a few simple reasons why that might happen.
A declining market
The consumer electronics industry has always been a magnet for consumers who are attracted to new and exciting products. But recently, the consumer electronics market has been weak, and RadioShack has suffered heavily as a result.
RadioShack's stock has been rapidly declining, falling from $4 per share in October to less than $0.90 per very recently. The company has annual sales of over $3 billion, while the current stock price at which it is trading devalues it to less than $100 million. Arch rival Best Buy (NYSE:BBY) is gaining market share in a weak consumer electronics market, beating RadioShack whose net loss last year was four times its current market capitalization.
Time to bail
RadioShack's smaller stores are facing difficulties in competing with Best Buy (BBY). Smartdevices have become a commodity in the U.S., and RadioShack doesn't seem to have the level or the cost structure to compete in this market. The company has already about $600 million in debt, $325 million of which is from a bond issue that will mature in 2019. Over the past year, the price of this bond has declined rapidly to a low of roughly $35. This implies that bond investors are not very confident about RadioShack surviving until 2019.
The company's book value is collapsing and it is trading close to this value with no assets on its balance sheet. At the end of the last year, it had a book value of over $200 million, twice the current market capitalization, which fell to $72 million after the first quarter this year, and for every day that RadioShack continues to operate, the book value declines.
The company's inventory has a book value of nearly $800 million, as most of its assets are tied up in inventory. This is not going to help the company even if it can liquidate all of it in an event of bankruptcy. This further implies that the liquidation value, which is more pertinent than the book value, is definitely not enough to cover the company's debt load. What investors and shareholders should be mindful of is the fact that, if the company goes bankrupt and liquidates its assets, then the company is liable to settle all its debts and hence, they will be the last ones to get paid.
RadioShack is mostly dependent on postpaid and prepaid handset sales to attain revenue growth, where it is challenged by wireless carriers who offer financing programs to consumers. Conclusively, RadioShack is unable to compete with these aggressive promotions and is facing tough price competition on most fronts.
In the first quarter, the company's total store count was 5,420, down from 5,580 in the year-ago quarter. In order to check the reducing expenses, the company plans to close up to another 200 stores. But, this initiative for reducing expenses is not much of a help as the revenues are declining at a much faster pace.
By the end of the previous quarter, the company had just $61.8 million left in cash on its balance sheet. The company's chances of turnaround are very dim and instead of taking risks, investors should consider companies that are efficient, are consistently generating free cash flow, and are offering strong future potential.
On the other hand, Best Buy witnessed a decline in its comparable store sales, which was way less than the declining rate of the whole consumer electronics market, thereby allowing the company to gain market share. The company achieved this through its aggressive prices, manifested by its declining gross margin. However, it survived the negative impacts via cutting costs.
According to Bloomberg, RadioShack is expected to run out of cash, and borrowing ability by 2016. Also, the slump in the electronics industry has almost killed off RadioShack's chances of a turnaround. Bloomberg reported:
"There is a bit of a slump," Scott Tilghman, an analyst at B. Riley & Co. in Boston, said in an interview. "There hasn't been a lot of innovation over the last few quarters, there hasn't been a lot of new product coming to market."
That slowdown may rob RadioShack Chief Executive Officer Joe Magnacca of the time he needs to cut costs and develop new merchandise, while making it harder to generate cash and pay back creditors. RadioShack also is "very unlikely" to entice acquisition suitors, said Oliver Wintermantel, an analyst at International Strategy & Investment Group in New York."
Also, RadioShack was recently found to have violated the Pennsylvania law for calculating overtime wages. RadioShack violated the Minimum Wage Act, which requires compensating workers by paying them 50% than the basic rate. This will turn out to be bad news for RadioShack as the company will have to pay fines out of its own pocket. RadioShack was already labelled as one of the worst places to work, and this has further deteriorated its reputation.
RadioShack's stock price has been beaten down badly. Though this can make the company look cheap and enticing for investors, the chances of a turnaround are really dim as the company is in a terrible condition. RadioShack is witnessing declines on almost every front, including comparable sales, gross profit margin, as well as a rise in operating loss. All this suggests that RadioShack is a strict "no go" for investors.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.