Buying Radio Shack Would Kill Dell

Dell (DELL) CEO Michael Dell said his namesake PC company should evaluate a business model that goes beyond the standard direct sales blueprint. But does that mean buying Radio Shack (RSH)?

BusinessWeek gives the idea some lip service. Based on Dell's memo that was posted in the Wall Street Journal (subscription required), BusinessWeek cooks up the following scenario:

• Dell needs retail heft.
• It swoops in to buy Radio Shack and grows its market share.
• You could even go to Radio Shack (Dell Shack?) to get your PC serviced.

The whole idea of Dell and Radio Shack is somewhat laughable, but someone bought it. Radio Shack shares closed up more than 5 percent. BusinessWeek's Peter Burrows writes:

"At least on paper, this merger could plug some of the strategic holes that have appeared in Dell's approach in recent years. Obviously, RadioShack's 4,000-plus stores would give Dell a meaningful retail footprint, filling a critical need, given that more than 50% of all PCs sold in the U.S. are sold at brick-and-mortar stores."

What's not to love? Just about everything. If this deal actually happened Michael Dell would be acquiring even more holes to fill.

Radio Shack showed some turnaround potential for the first quarter ending March 30. The company reported net income of $42.5 million on revenue of $992 million. Same store sales were down 9.2 percent and total sales fell 14.5 percent. Radio Shack ended the first quarter with cash of $463 million, up from a paltry $45 million in the same quarter a year ago. There are signs of progress at Radio Shack, but let's not get carried away.

Radio Shack would kill Dell 2.0. Rick Weinhart, an analyst at BMO Capital Markets, assessed Radio Shack's prospects in a May 1 research note:

"How long before the wheels fall off? Once again, Radio Shack has shown an uncanny ability to cut costs and improve margin, even modestly better than we expected this quarter.  However, we continue to believe this financial engineering is coming at the cost of not only short-term sales, but long-term as well. We think brand advertising, in-store labor, store investments, and systems investments have all been reduced substantially, in some cases below levels that we think are necessary for long-term health."

And then there's the whole concept of Dell as a retailer. Aside from Apple (AAPL), show me one PC company that was able to stand out as a retailer. How about those Gateway (GTW) stores?

It just doesn't add up. A purchase of Radio Shack would be a major distraction. Should Michael Dell be worried about redesigning little stores in a strip mall or improving customer service and developing products–notably Linux powered ones–that people want to buy? Give Burrows credit–he's certainly thinking out of the box.  

Here's a better move for Dell: Kiss Best Buy's (BBY) tail, buy some shelf space and sell PCs there. That move is a bit conventional, but it's not going to result in a Radio Shack sized disaster.    

See also: Dell-RadioShack Merger? I'm Not Holding My Breath

DELL vs. RSH 1-yr chart:

Comments

[omodes123]

why would I go 30 miles to the nearest compusa or best buy when there's a Radioshack selling dell less than a mile away.

[omodes123]

gateway never had that presence.