Following the horrible results posted from RadioShack's (RSH) latest earnings report on June 11, B. Riley & Co. lowered its price target on the company from $1 a share to zero, singnaling another prediction for the company's march to grave.
The 2014 Q1 report posted on June 10 marked RadioShack’s ninth consecutive quarterly loss. The company lost $ 98.3 million, or $0.97 a share, compared to a loss of $28 million, or 28 cents a share in the year-ago period. Its revenue dropped 13 percent from $848.4 million to $736.7 million. Sales fell 14 percent for stores open over a year.
Shares were down over 10 percent on the day it came out, and continued to drop 7.25 percent the second day when B. Riley’s analyst cut the price target to zero. The continuous stream of disappointing earnings in the past several years could indicate that time may soon run out for this once prominent player in the electronics retail business.
RadioShack Makes a Hail Mary
RadioShack has given themself a year to achieve a turnaround. The company's total liquidity decreased from $554.3 million at the end of 2013 to $ 423.7 million at the end of the quarter. But its Chief Financial Officer John Feray assured investors that the liquidity they hold was enough to fund its turnaround for the next 12 months.
To make the turnaround feasible, RadioShack has planned or already enacted several changes. First, to decrease expenses, RadioShack plans to reduce rent costs, cut customer compensation expenses, consolidate to fewer freight carriers to reduce rates, buy more store fixtures from Asia, and examine utility bills and rate plans. Like Office Depot (ODP), RadioShack plans to do more with less and shutter 200 stores per year over a three-year period.
Second, the company launched RadioShack Labs with PCH on June 5 to support startups and inventors to boost new product innovation. RadioShack plans to use a "direct-to-store" model for select products by reducing inventory requirements and increasing inventory turn in stores. The “RadioShack labs” is built to mainly stimulate innovation and raise consumer awareness to save its mounting losses in dropped sales. This could be an opportunity to fight against the industry-wide decline in electronics sales and low mobile phone demand due to few new models.
Other moves, such as adding services including in-store mobile device repair service to increase customer volume, are in the planning stages. The company's Chief Executive Joseph Magnacca has acknowledged the implementation has taxed the company, saying "We were trying to do too much too quickly." Magnacca, though, is confident that, once implemented, the moves will be a success. He added that the recent quarter report did not showcase their turnaround plan, and he was confident about that the company was able to overcome its challenges.
"Survival is in Real Jeopardy"
However, B. Riley's analyst Scott Tilghman said a RadioShack turnaround was nearly impossible for RadioShack at this point, noting the challenges facing the company in the already competitive environment. "Survival is real jeopardy" after a deeper look at the company's moves to turn it aroundaccording to Tilghman.
Even though the company assured investors that it had enough funds to recover, Tilghman said the capital was not enough to reach RadioShack’s plan to update 30-40 percent of its inventory and remodel select stores. He claimed that the company made the decision too quickly and without comprehensive examination, as Magnacca admitted.
Regarding RadioShack’s intention to saving money by shuttering stores, when the earning's report came out in March, Janney's analyst David Strasser said he didn't see the company's ability to close more than 200 stores within a year because creditors wouldn't allow it to give out "scarce cash."
Could RadioShack Be The Next Circuit City?
What RadioShack is going through now could easily remind investors of the Circuit City bankruptcy in 2008. Like RadioShack, Circuit City talked about plans for store remodels before the bankruptcy, but their fate went unchanged. The overwhelming economic malaise and continuous loss in market share ultimately proved irreversible.
Tilgham believes the important question of support vendors would seal the fate for RadioShack. Like the Circuit City case, it was the vendors that determined its fate in bankruptcy. RadioShack mentioned they have received support from vendors, but no detailed information was enclosed. In the coming back-to-school season when demand for mobile phones is high, the company's capital might not equal to its sales ambitions by storing enough products.
“We think the odds of a bankruptcy filing are now over 50 percent,” said Tilghman. In general, the market takes a “look and see” attitude towards RadioShack, but if a similar trend to Circuit City persists through this key selling season, any extra moves the company makes might become moot.
But When Will They Turnaround?
The company's stock plunged more than 50 percent this year and hit new low of $1.31 on Wednesday. Compare that to its peak of almost $80 per share in 1999.
It’s not so surprising to see RadioShack, with its fluctuating marketing plans, is struggling to survive in a time when it's competing against online retail giants like Amazon (AMZN), online auction C2C ecommerce sites like eBay (EBAY), and physical retailers with explicit market targets such as Best Buy (BBY) .
As Tilghman said, RadioShack really has had to fight to maintain any relevancy and rework its business model just to stay afloat even with a much smaller store bay. But based on its current disappointing performance, there may not be much time left for RadioShack to rework itself. Based on its continuous losses, quarter after quarter, in recent years, it’s possible that things will only get worse as it still operates many money-losing stores. Plus, RadioShack plans to spend money to remodel stores and make other changes. These are most likely weighing on RadioShack’s operating expense.
Most likely, RadioShack will have to pursue the option of bankruptcy by the end of next year, if it does not find another source of funding.