RadioShack Reverses Two Years of Sales Declines

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RadioShack reversed almost two years of severe comparable-sales declines with a modest same-store sales bump (up 1.4%) in the second quarter. However, management indicated RadioShack experimented with promotion and clearance sales events to drive customer transactions, and analysts don’t think the firm can sustainably maintain this strategy without impairing profitability. Gross margins continued to decline steeply, falling 290 basis points year over year to 37.2%, while selling, general, and administrative expenses were flat on an absolute basis but increased 20 basis points as a percentage of sales (to 39.9%). As a result, operating margins fell 320 basis points to negative 4.9%, representing over $40 million in operating losses.

RadioShack’s management is working quickly to execute the turnaround, and has access to over $200 million of cash, after netting out the $210 million convert maturity. However, the company continues to burn cash at a rapid and unsustainable pace. Consequently, RadioShack has a small window of opportunity to find a new viable strategy, so investors remain skeptical of the turnaround’s probability of success.

RadioShack also announced a few significant corporate developments. The company hired AlixPartners, a global business advisory firm with expertise in global turnarounds, and Peter J. Solomon Company, an investment banking firm, to support the company’s turnaround initiatives. Additionally, RadioShack’s current CFO, Dorvin D. Lively, has resigned to pursue another retail opportunity, so Holly F. Etlin, a managing director at AlixPartners, will temporarily take the helm while the company searches for a permanent replacement.

Investors are somewhat concerned about this executive turnover, but we do not think this development reveals anything about RadioShack’s situation that we do not already know. It is uncertain how much value the outside advisers will add to RadioShack given the significant structural headwinds the firm is facing, but as long as the services are not excessively priced, we think it is prudent to explore every alternative.

 

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