To warn all you kids who aren’t really into the investing stuff, this post will be all about Radio Shack, that quaint little retailer you used to buy electronics from before Al Gore invented the internet. If you never want to read another analysis on a company ever again, let me know in the comments. I constantly worry with these types of posts that nobody actually bothers to read them. So please, for once in my life I’m actually asking you nicely, tell me if you think these are boring. All others can go to hell.
Anyway, back to Radio Shack. As you can imagine, Amazon is kicking their ass worse than my Blue Jays got beat by Texas over the weekend. Just check out this 5 year chart:
Yikes. I’ve taken more attractive dumps.
I love these kinds of stocks. Obviously, there’s good reason why Radio Shack is struggling. Electronics are a tough business, with both Amazon and Wal-Mart encroaching on their business. Will I think the same thing once I dig a little deeper into the company? Ooh, the suspense.
First, a picture.
LOVING THE 80s STYLE PRINTING ON THE SIGN
Okay, these days Radio Shack is basically two businesses. The first is the business that’s been around forever, the regular electronics stores. Radio Shack believes they have an advantage over the other guys because they have smaller stores in more convenient locations (in the mall mostly) and because they have awesome staff who know everything about electronics. One of these is actually a competitive advantage. This business is boring, struggling, and is losing ground to competitors every day. In Radio Shack’s defense, the revenue loss has only been minimal, at least so far.
The other business is much more exciting. The company operates wireless stations where you can show up, compare plans between the big 3 carriers (AT&T, Verizon, Sprint) and walk out of there with a brand new iPhone on the best plan. These wireless stations are located both in the company’s stores and in just about 1500 Target locations. The company was doing the same thing in Sam’s Clubs, but they discontinued the arrangement in 2011.
In the most recent annual report, the CEO spends a lot of time telling everyone how exciting the wireless part of the company is. Revenue was up over 50% year over year at the Target kiosks, rising from $457.6M in 2010 to $714.7M in 2011. Revenue growth is good, especially 50% revenue growth. Great news guys! In a bizarre twist of fate, Target will be Radio Shack’s savior!
Except for one problem. The Target kiosks don’t actually make money.
They do a nice job hiding it in the annual report, going as far as grouping the results from the Target division with their (very profitable) results in emerging markets, since those are totally almost the same types of business.
Why are they losing money at these Target stores? The company never bothers to disclose what they’re paying Target for the space, but it’s gotta be something, and it’s obviously eating into profits. The other reason is because everyone wants iPhones, so the carriers don’t offer RSH very much to sell one. Radio Shack needs an alternative to the iPhone.
If I bought Radio Shack, I’d own 3 companies that are hoping for Apple to slip up. That’s a lot, even for a moron like me.
Secondly, the company has done some pretty stupid things over the last little while. The dividend stayed steady at 25 cents per share from 2003-2010, when they suddenly decided to double the thing in 2010. This is the same year the company took out a $400M line of credit just in case they needed it. They’ve only used like $15M of it so far, but the two actions are sending contradictory signals to the market.
They also bought some shares back in 2011, but discontinued the practice shortly thereafter. So the company is in good enough shape to DOUBLE the dividend, yet they wouldn’t want to buy back shares sitting at a 20 year low? Makes total sense.
Operating income is getting crushed, free cash flow is down, the company decides they need more credit, and then they raise the dividend? Well done, morons.
Often with mature retailers like Radio Shack, the company is sitting on all sorts of valuable real estate accumulated from decades of growth. Radio Shack is the exception to the rule, since almost all their retail locations are leased. This represents a significant commitment going forward. It does make closing stores easier in the future, since all the company needs to do is wait until the lease is up and then blow out all the inventory.
The balance sheet is decent, book value is around $7.75 per share, which includes very little in real estate. They’re sitting on $566M in cash, and the dividend costs the company about $50M per year. They have a good cash hoard, which is good, because they have $375M worth of convertible notes due in 2013. I assume they’ll use the aforementioned $450M line of credit to pay these off. Radio Shack would be a lot more compelling without all this debt.
When you invest in a company like Radio Shack, there needs to be some sort of catalyst to get the company out of its funk. Whether it’s a takeover offer, unexpectedly good results, or even a turnaround in the underlying industry, something needs to change for the stock price to turn around.
What exactly would that be with Radio Shack? I have no idea. Nobody wants to buy them out. Internet competition is very real, and it’s not going away soon. The only thing I can think of is taking these Target stores to a respectable level of profitability. Unless the iPhone loosens its dominance on the market, I can’t see anything that’ll put life into the stock price.
So, like I said above, Radio Shack becomes a play on a) iPhone sales slumping and b) A migration away from buying electronics online. I think this one’s a value trap kids.
Disclosure: I own no shares of Radio Shack. I will probably point and laugh at anyone who does.