Radioshack (RSH)

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See all Bulls Reasons Bulls: Reasons To Buy Do you Shop There? 100% agree Do you Shop There? Anyone? View or Edit Reason 1 votes 100% agree This is just the start of the RadioShack turn around led by CEO Day 0% agree This is just the start of the RadioShack turn around led by CEO Day This is just the start of the RadioShack turn around led by CEO Day. View or Edit Reason 1 votes 0% agree Picking on potential value 0% agree Picking on potential value Now that the low-hanging fruit has been picked, investors need to figure out whether what remains is worth climbing what could be a rickety ladder. Most investors tend to shy away from companies that aren’t growing, and generally flee from those that are shrinking. Still,... read more View or Edit Reason 1 votes 0% agree See all Bears Reasons Bears: Reasons To Sell "iPhone causing increase in direct sale, putting 30% of RSH's sales at risk" 100% agree "iPhone causing increase in direct sale, putting 30% of RSH's sales at risk" After the launch of the iPhone, consumers accelerate the pace of switching from 3rd party distribution of wireless phone to direct sale, putting 30% of RSH’s sales at risk. Other new products may fail to make up the traffic difference. View or Edit Reason 1 votes 100% agree iPhone causing increase in direct sale, putting 30% of RSH's sales at risk 100% agree iPhone causing increase in direct sale, putting 30% of RSH's sales at risk After the launch of the iPhone, consumers accelerate the pace of switching from 3rd party distribution of wireless phone to direct sale, putting 30% of RSH’s sales at risk. Other new products may fail to make up the traffic difference. View or Edit Reason 1 votes 100% agree RSH's convenience advantage is going away 100% agree RSH's convenience advantage is going away RSH’s convenience advantage is going away. Best Buy (BBY), Circuit City Stores (CC), Target (TGT), and Wal-Mart Stores (WMT) will add over 400 outlets in 2006 with more square footage than RSH. View or Edit Reason 1 votes 100% agree Send the authors a comment or suggestion You really need to more clearly say that radio shack has ventured away from it's core business, a... more [Dismiss] [Done] The article is a good overview of RadioShack. The company is in a bit of a quandary. Currently,... more [Dismiss] [Done] See All Suggestions

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RadioShack (NYSE: RSH) is a retailer of consumer electronics and services and generated $4.2 billion in sales in 2007, an 11% decrease from 2006. The company operates and licenses nearly 6,000 stores in the U.S. and Puerto Rico and over 150 locations in Mexico. In addition, the company operates approximately 800 wireless kiosks inside Sam's Club locations and in mall locations under the Sprint Nextel name. Primary product categories include consumer electronics, wireless phones, special and general-purpose batteries and accessories. The company estimates roughly 94% of Americans live or work within five miles of a RSH store.

The company has drawn a lot of investor attention since last summer when CEO Julian Day began turning the company around from its precipitous decline in 2005. By cutting costs, including layoffs, inventory cleanup, and cutting down on advertising, RadioShack’s margins have increased substantially despite decreased sales. In 2007, operating profit more than doubled from $156.9 million in 2006 to $381.9 million despite an overall decrease in net sales.

Another factor fueling skepticism about the strength of RadioShack is its dependence on a increasingly saturated U.S. wireless market. Historically, over one-third of RadioShack's sales are from wireless activations, however RadioShack's wireless partner, Sprint Nextel (S) is falling in wireless competition, which has seriously hindered RadioShack's sales and profits in fiscal 2007, management claims that falling sales of Sprint Nextel (S) products were responsible for as much as 80% of Radioshack's decrease in sales for FY 2007. In addition, large electronics retailers such as Best Buy (BBY) and Circuit City Stores (CC) are increasingly selling accessories--a traditional strength for RadioShack--in conjunction with core, large-ticket items such as flat-panel TVs.

[edit] Company Overview

The company was started as Radio Shack in 1921 in Boston, Massachusetts, by two brothers, Theodore and Milton Deutschmann, who wanted to provide equipment for the then-cutting-edge field of amateur radio. The store's name was taken from a slang phrase of the time denoting any place where radio equipment was kept and used. After falling on hard times in the 60s, RSH was purchased by the Tandy Corporation for $300,000. In 1977, Radio Shack introduced the TRS-80, one of the first mass-produced personal computers that became a big hit. In the late 1980s, Radio Shack made the transition from its proprietary 8-bit computers to its proprietary IBM-PC-compatible Tandy computers. Shrinking margins and a lack of economies of scale led Radio Shack to exit the computer-manufacturing market by the mid-1990s. Since then, the company has moved into small components markets for consumers, with a focus on marketing wireless phones.

[edit] Operations and Services

Radioshack owns and operates over 6,000 stores and outlets in the United States and Mexico, as well as almost 800 kiosks throughout the US. The company specializes in wireless phones and accessories and sells third party products (e.g., Cingular Wireless phones and GE cameras) and also its own branded products such as batteries.

Store and on-line inventories include: phone and radio communication; portable music; cameras and camcorders; power and battery supplies; cables and other parts; toys and games; computer hardware and software; and personal electronics for car, home and office.

• Dealer Outlets: As of the end of 2006, RadioShack had a network of 1,484 dealer outlets, including 36 located outside of North America. These outlets provide private label and third-party branded products and services to smaller communities. These independent dealers are often engaged in other retail operations and augment their businesses with our products and service offerings.

• RadioShack.com: Products and information are available through their commercial Web site. Online customers can purchase, return or exchange various products available through this Web site. Additionally, certain products ordered online may be picked up, exchanged or returned at local RadioShack locations.

• RadioShack Service Centers: RadioShack maintains a service and support network to service the consumer electronics and personal computer retail industry in the U.S. They are a vendor-authorized service provider for many manufacturers, such as Hewlett-Packard, LG Electronics, Motorola, Nokia, RCA, and Sony. In addition, they perform repairs for third-party extended service plan providers. As of the end of 2007, there were eight RadioShack service centers in the U.S. and one in Puerto Rico.

[edit] Products and Revenue

RadioShack's generated revenue in 2007 of $4.2 billion, a decline of nearly 11% from 2006. Simultaneously, the company's operating margin was 8.9% in 2007, up from 3.2% in 2006.

While the company may be able to make up for losses in certain categories such as Service and Power--which has declined over the past year--driving traffic with popular products like lower margin MP3 players may take a toll on the bottom line that CEO Day has worked to drive down.

• The Wireless segment represented $1.4 billion of sales in 2007 (33% of total revenue), which was a 14% decline from 2006 as sales of wireless handset units continue to drop. Sluggish industry sales aren't helping as the company attempts to continue to transition to Cingular after a beneficial, long standing relationship with Verizon
• Accessory sales (24% of net sales) declined 5% to $1.0 billion in 2007.
• Modern Home sales fell 9% to $556 million in 2007, which accounted for 13% of net sales. The company's move into the flat-panel televisions category may prove to be a difficult venture as larger competitors have a strong hold on the market.
• The Personal Electronics category was negative (9.0%) as weakness in satellite radio and toys was offset by strength in digital cameras and MP3s.
• Power platform sales declined 7.4% in 2007 to $251.3 million (6% of total revenue).
• Technical sales decreased 7% to $184 million in 2007 as sales of specialty tools (i.e. robotics kits) remain slow.
• The Service category declined 5.5% to $100 million in 2007, while Service Center and Other sales declined 34.3% to $62.6 million.

In 2007, kiosk sales decreased 12.7% from 2006, largely due to fewer kiosk locations. “Other” sales declined 11.2% in 2007 due to fewer service sales.

[edit] Business Drivers

[edit] Cost Control

Since current CEO Julian Day took over in 2006, RadioShack has focused on rapidly cutting costs rather than sales growth. Cost cutting measures have included one-time layoffs, decreasing corporate support staff, lowering legal and consultant fees, cutting advertising costs (i.e., less TV, more radio and print usage), and reducing sponsorship programs.

As a result of these initiatives, sales in first quarter of 2007 decreased 14.5%, from $1.2B to $1.0B compared to the first quarter of 2006. Same-store sales for the quarter declined 9.2% vs. 1.0% in the prior year period. On the positive side, RadioShack generated $37M in available cash flow (versus a loss of $310M last year) due to better inventory management and reduced capital expenditures.

Margins also benefited from a favorable product mix shift largely due to a decline in lower margin goods. In the first quarter of 2007, sales of the lower margin wireless category declined 25%; the category generated 35% of total revenue in 2006. This category carries an estimated production margin rate of roughly 40% versus the corporate average of 50%. Also, personal electronics sales (16% of total revenues) declined 9% and this category carries a rate of approximately 20%. On the more positive side, accessory (23% of revenue) and power (6% of revenue) category sales were basically flat. These categories carry higher production margin rates of about 65% and 85%, respectively.

[edit] Wireless Market

[edit] Pre-Paid Market Adds On the Rise

Net subscriber additions (“net adds”) are the result of customers signing up for service ("gross adds") minus those disconnecting ("churning"). Cingular’s 4Q net adds were strong, but churn was down--churn is good for RSH--and overall, prepay grew to 46% of net adds from 24% a year ago. Pre-pay is estimated to be only 1/5 as profitable as post-pay for RSH. As prepay grows in importance in the U.S. wireless market, RadioShack is likely to lose its margin on its largest segment, and likely more business from independent retailers of service providers.

[edit] Market Saturation

Sprint/Nextel-the company that RadioShack’s kiosks are run with- has been losing market share to Cingular/ATT and Verizon in a market that is quickly saturating. According to Morgan Stanley, 77% of the U.S. population now has wireless service, with U.S. wireless penetration rates climbing another six percentage points during 2006. Now that only 23% of Americans are without wireless service, and many of these are either children or unable to afford it, growth becomes more of a struggle. Sprint/Nextel has been floundering recently in the wireless market and as a result, RadioShack's wireless sales have been hurt so far in fiscal 2007.

[edit] Merchandising, Apple and GE

The iPhone will not, at this time, be avaiable through RadioShack, who ordinarily is a dealer for Cingular Wireless. It's anticipated that iPhones will count for a large portion of of Cingular's overall new activations. Apple and Cingular have stated that the iPhone will be sold initially only through Apple stores, Cingular direct stores, and their respective websites. It is unclear whether outside retailers, RadioShack among them, will be allowed to sell the iPhone, though it is clear that no one will have the phone for the launch scheduled for late June 2007. If RadioShack was given semi-exclusive right to sell the iPhone, on account of its high number of activiations for Cingular, it might have been the boost to its wireless business that it needed.

In order to maintain market share and increase profits, RadioShack may need to find a product with high margins and exclusivity. Many of the products that RadioShack currently sells are in very competitive markets or aren't particularly profitable.

The new GE camera, the E8500, was released at RadioShack in time for Father's Day this year. The GE E850 sells for less than $200 and will be available exclusively at RadioShack until September 2007. These kinds of exclusive merchandise will provide the retailer with opportunities to drive increased traffic from consumers, many of whom may buy other items once inside the store.

Popular items such as big screen flat panel TVs are too big to merchandise in RadioShack retail locations, and these particular items are experiencing declines in margin across the industry due to hyper competition.

Accessories are small and high margin, but their demand curve is waning as competitors better accessorize their own products. iPods and other MP3 players are small and carry high dollar values, but margins are tight from competition. GPS units are an interesting item currently, but RadioShack does not hold any exclusivity on these devices.

[edit] Competition and Metrics

Outside its core battery and accessory business, RadioShack faces a great deal of competition. In an attempt to decrease its dependence on its wireless sales, RadioShack's increased push into consumer electronics such as television and iPods brings it into more competition with firms like Best Buy (BBY) and discount retailers such as Wal-Mart Stores (WMT). Additionally, many retailers, Best Buy and RadioShack among them, are and may continue to feel a squeeze on margins and profits in the maturing wireless communications market.

Phone cords, speaker wire, belt clips and headphones for wireless phones has been a long-time selling strength for RSH as bigger competitors tended to focus on the sale of core products (e.g., TVs, sound systems, phones) and spent less time trying to accessorize it. Today, companies such as Best Buy and Circuit City Stores (CC) have become better at accessorizing sales of their bigger-box products, requiring fewer trips to RadioShack to complete the package. This leaves fewer opportunities for RadioShack to capitalize on many of the smaller, higher margin sales that their competitors used to miss.

While its main competitors, Best Buy and Circuit City, are opening more stores to drive up sales and profits, RadioShack is cutting costs and closing stores, which has increased its margins but at the expense of sales. It seems, therefore, that RadioShack's improvement is less sustainable than Best Buy's or Circuit City's.

 Radioshack

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	Select All  |  Select None Companies Best Buy (BBY) Circuit City Stores (CC) Conn's (CONN) Gamestop (GME) HHGREGG, INC. (HGG) REX Stores (RSC) Radioshack (RSH) Cancel

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Company	Data From	Percentage of Revenue from Services	Sales per Store	Inventory Turnover	Revenue	Same Store Sales Growth	Percentage of Revenue from Entertainment
Best Buy (BBY)	2008	6%[1]	Add	Add	$40B[2]	2.9%[3]	19%[1]
Circuit City Stores (CC)	2008	7.3%[4]	$7.98M[5]	Add	$11.7B[6]	(7.7%)[7]	12%[4]
HHGREGG, INC. (HGG)	2008	Add	$13.8M[8]	7[8]	$1.26B[9]	4.8%[8]	Add
Radioshack (RSH)	2007	4.3%[10]	$637K[11]	3.3[11]	$4.25B[12]	(8.2%)[11]	Add

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[edit] References

1. ↑ ^{1.0 1.1} BBY, 2007 10-K, Item 7, Page 33
2. ↑ BBY, 2007 10-K, Item 8, Page 62
3. ↑ BBY, 2007 10-K, Item 7, Page 32
4. ↑ ^{4.0 4.1} CC, 2008 10-K, Item 7, Page 30-31
5. ↑ CC, 2008 10-K, Item 6, Page 21
6. ↑ CC, 2008 10-K, Item 8, Page 44
7. ↑ CC, 2008 10-K, Item 7, Page 22
8. ↑ ^{8.0 8.1 8.2} HGG, 2008 10-K, Item 6, Page 22
9. ↑ HGG, 2008 10-K, Item 8, Page 41
10. ↑ RSH, 2007 10-K, Item 7, Page 21
11. ↑ ^{11.0 11.1 11.2} RSH, 2007 10-K, Item 6, Page 17
12. ↑ RSH, 2007 10-K, Item 15, Page 47