RadioShack (NYSE:RSH) has been performing poorly over the last few years. The company is engaged in retail sales of consumer electronics goods and services, and failed to meet its profitability via its business operations. The sales are decreasing with uncontrollable increasing operating costs, leading the company towards severe liquidity problems. Further, the continuously deteriorating financial health of the company has also failed to impress the market and the stock has substantially lost its value over the last five years - year-to-date, the stock is down over 76%.
Moreover, it has also been debated that the company could prosper in the long-run by decreasing its costs essentially by closing unprofitable stores and increasing the net sales during the period. However, considering the contractual restrictions of closing a minimum number of stores in a year (which will be discussed later in the article); the company will continue to lift the burden of unprofitable stores - thus increasing the losses in the short-term. Therefore, based on company performance and its future prospects, we believe the persistent losses will increase the liquidity crises for RadioShack.
RadioShack is one of the leading national retailers of innovative mobile technology products and services, as well as products related to personal and home technology and power supply needs. These products and services are sold through two portals: company-operated RadioShack store chain and Dealer outlets. The company derived a major portion of its revenues from its company-operated stores, which accounted for over 52% revenues in the last year. By the end of the last year, there were around 4,297 RadioShack operated stores in the U.S. which are located in major shopping malls as well as individual storefronts. However, the Dealer outlets provide name brand and private brand products and services, typically to smaller communities. By the end of last year, there were 943 RadioShack dealer outlets in the U.S. and overseas. However, the company did not recognize any significant sales outside the U.S. through these dealer outlets.
Moreover, in order to manage the merchandise and product assortment more efficiently, the company structured its reporting into two segments: Mobility and Retail. The Mobility segment includes postpaid and prepaid wireless handsets and related services including commissions, residual income and prepaid wireless airtime. Further, the Mobility platform includes e-readers, tablet devices and its related accessories. The Retail segment includes the remaining consumer electronics product categories and related accessories including batteries and power products as well as technical gadgets.
Restructuring is the Only Short-Term Plan for the Company
As the retail industry is moving towards modernization, the industry trends are also shifting their focus towards increased efficiency and productivity. Moreover, the intense competition in the electronic retail industry is shrinking profit margins of the companies, which has prompted them to substantially reduce their operating costs to increase margins. RadioShack, one of the leading electronic retailers, has found it difficult to increase its sales and reduce its operating costs over the last few years. The company reported decreased net sales and operating revenues over the last few years, which resulted in losses due to comparably higher operating costs during the period.
RadioShack needs to control the cost in order to increase its profitability and shareholder value in the long-run. The company announced to close as many as 1,100 of its stores in March, which is constrained by the credit agreements. The closure of these planned 1,100 stores could substantially reduce the operating costs of the company by eliminating unprofitable stores from the company books. However, this decision is somewhat hindered by the company credit policies which state that the company could not close more than 200 stores in a single calendar year. This will impact the company's ability to decrease its operating costs in order to improve its profitability and increase its operational efficiency. The table below shows some key expenses as percentage of revenues over the last two years - the trend is not encouraging for the company.
Source: SEC Filings
Another way of dealing with liquidity crisis is to maximize the net sales of the company. RadioShack is putting a lot of hope into its new remodeled stores which bring innovative products to market with new store formats. The company recently announced to open 21 such interactive Remodel stores in San Francisco Bay Area. However, the results of these efforts have not been very fruitful as the company has already remodeled some of its stores and the sales continue to fall.
Source: SEC Filings
Further, the first quarter results were also disappointing regarding the net sales, with 13% year-over-year decline to $736.7 million. The year-over-year net losses also widened from $28 million to $98.3 million.
Source: SEC Filings
Efforts to Decrease Costs are Failing
RadioShack managed to reduce its operating costs by only 0.9% to $12.4 million in the last year, which was mainly offset by the sharp decline in sales during the period. This decrease in sales is largely due to a substantial [10.4%] decrease from company-operated stores sales. Dissecting the segmented performance of the company, the Mobility segment, which represented 52.4% of the total net sales of the company, decreased by around 10% during the last year. This decrease is mainly due to the depreciated amounts of upfront commission revenue and residual income from wireless service providers during the period. Further, the Retail segment also followed the path and reported a decrease of around 10% in the last year.
Source: SEC Filings
Moreover, the company reported decreased segmented revenues in the first quarter with 14% decline in its mobility segment driven down by customer traffic declines during the period.
The financial health of the company is extremely poor and if the losses continue; RadioShack will be in deeper troubles regarding its cash flows. For companies in a similar condition, it is very important to have a sound strategic plan in place to have a turnaround. In RadioShack's case, the plan does not seem to be working at the moment. The company is trying to decrease costs and enhance sales; however, the credit agreements and falling sales are not allowing the company to show any progress. We believe RadioShack will continue to suffer in the short-medium term and it needs a sound plan and some efficient execution in order to have a future.
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