Here's Why Investors Need to Stay Away from RadioShack

RadioShack (RSH) has done enough to take the electronics industry to a new level with various turnarounds in its history. But it is struggling to remain competitive in the market as it has lost nearly 85% of its value since the beginning of 2010.

RadioShack posted a worse-than-expected loss recently, and ratings agency Standard & Poor's warned that the company could default on its debt within a year. In such circumstances, the company is looking for a turnaround with its transformational strategies.

A Turnaround Plan

The company is planning to renovate its stores with new displays that could bring back consumers, but is it enough to woo its shareholders who are aware of the challenges? Moreover, RadioShack is facing a fundamental problem that could even pressure the company to exit from the market.

Though the company reported 1.3% increase in same-store sales, it was accompanied by an operating loss of $41 million — about 300% increase from the previous year. Also, the prior two quarters had witnessed a drop of same-store sales of 5.7% and 5%, respectively.

Though the company is talking enough about its turnaround, it has hardly rolled out any new concept except a few such as stores featuring unique displays. But this isn't enough as its product category remains unchanged. It still sells commodity products that are available in various online and other stores.

For example, Ron Johnson, former CEO of J.C. Penney, spent hundreds of millions of dollars remodeling the retailer, but same-store sales decreased dramatically during his term. On the flipside, stores like Wal-Mart and Costco wouldn't win any visual awards, yet their businesses continue to dominate their respective retail sectors. RadioShack has to come out with something unique that could help the company to survive in the harshly competitive market.

Moreover, RadioShack isn't the only company remodeling. Its big box competitor Best Buy is in the midst of its own turnaround, while wireless carrier AT&T is also focusing on its retail arm.

The Competition

On the other hand, Best Buy's new CEO, Hubert Joly, displayed a strong turnaround plan focused on cost cutting, bolstering the store's online operation, and partnering with major electronic firms for mini "store-in-stores" concepts. Also, Apple's success over the last few years has been bolstered by its retail arm. Apple's stores give customers a place to demo and learn about its new products, as well as receive tech support from knowledgeable employees.

Similarly, Samsung and Microsoft are adopting this concept. Both these companies have signed agreements with Best Buy to set up shop within larger Best Buy stores. This has resulted in a concrete move that will undoubtedly bring much better results, and this move was appreciated by many analysts.

Meanwhile, AT&T has also showed strong plans for its retail operation. Although most would not view the wireless carrier as a direct competitor, RadioShack's focus on mobile phones (the company said wireless accessories were a key driver of growth last quarter) could be hampered by AT&T's new strategy. Also, AT&T has built its first concept store in Chicago, and it is planning to roll out the design to 2,300 stores by 2014. Bloomberg calls AT&T's new design a "blatant knock-off" of Apple's stores — but that could be a good thing for AT&T.

With this focus on its retail operation, many subscribers could be seen moving to AT&T stores to buy their phone and accessories, and not RadioShack. Moreover, AT&T enjoys nearly a third of the market. If this strategy gets successful, it will certainly give tough competition to its competitors like Verizon and Sprint.

However, RadioShack does offer the other big retailers a chance to acquire the company if this trend of net losses continues in the future. In that case, RadioShack's retail stores could be attractive assets to many companies like Best Buy or Amazon.

Valuation

On a financial basis, RadioShack appears to be trading at a discount. However, RadioShack is facing a crisis as it is attempting to salvage itself with an aggressive store remodeling, but its competitors aren't standing still — Best Buy is undertaking its own turnaround plan, while AT&T is making a concentrated push to revamp its retail experience.

With a short float near 40%, any improvement in the company's core business would likely trigger a strong price appreciation. But that improvement appears unlikely.

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