Best Buy Vs. RadioShack: Which One Will Fail First?

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Inside A Best Buy Store Ahead of Earnings Figures
David Paul Morris/Bloomberg/Getty Images
Tuesday was a day of extremes for investors of consumer electronics retailers. Shares of Best Buy (BBY) plunged 7 percent after posting disappointing quarterly results. That contrasted sharply with shares of RadioShack (RSH), which soared 19 percent on reports that a shareholder rescue package was in the works.

We can't judge the fate of two meandering chains on a single trading day. After all, Best Buy may have let the market down by posting weaker-than-expected sales, but at least it's not the one hoping that a "rescue package" will save it from bankruptcy.

Anytime a stock appreciates by a fifth of its value on anything with the words "rescue" and "package," you know there's a fairly good chance that it's not going to end well.

Best Buy Is the Better Buy

There's no denying that Best Buy is in a funk. Sales declined 4 percent to $8.896 billion, fueled by another quarter of shrinking comparable-store sales. The consumer electronics superstore chain sees the weakness continuing. It sees negative comps continuing through at least the next two quarters.

Consumer appetite has been weak in general. Tablet sales have been cooling off, and Best Buy points out that the smartphone market has stalled ahead of the iPhone 6 hitting the market. Apple's (AAPL) new smartphone should be unveiled at some point next month, but it's doubtful that will be enough to light a fire under the mobile handset market. Apple updates the iPhone every year, and none of those upgrades have been enough to save Best Buy over the past two years of sliding sales.

However, unlike RadioShack, Best Buy is still profitable. In fact, its adjusted earnings actually climbed in its latest quarter. The retailer has been successful in shaving its overhead to the point where it can grow its bottom line despite coming up short on top. It's a trick that Best Buy can't keep performing forever. Sooner or later it's going to have to find a way to get shoppers to come back. However, for now Best Buy is earning more than enough to cover its quarterly dividend.

Thinking Outside the Small Box

Things are going far worse at RadioShack. Forget dividends: RadioShack paid out its last dividend more than two years ago. Forget earnings: RadioShack hasn't been profitable since 2011.

The iPhone 6 won't save RadioShack. It's been profitless through the last two generations of Apple hardware. RadioShack's lack of earnings coincides with when it decided to emphasize mobile products and services a couple of years ago. It was right to do so; mobile usage has been a growth industry. Unfortunately for RadioShack, smartphone shoppers just aren't buying their Android and iPhone handsets at its stores.

Same-store sales plunged 14 percent in its most recently reported quarter, and deficits are widening. RadioShack is closing stores. It's attempting to remodel its remaining stores, but that doesn't come cheap. With $615.4 million in debt and its stock trading for pocket change, it seems as if RadioShack is on borrowed time.

This brings us to Tuesday's report. Sources tell Bloomberg that RadioShack's second-largest investor is trying to spare RadioShack from filing for bankruptcy. It's looking to issue debt or equity to help improve the chain's liquidity. Then again, access to capital isn't as relevant as the company's past few years of destroying it.

So where should investors be? Best Buy is bad, but RadioShack is worse. Best Buy is a stock where investors need to weigh the serious challenges it faces to start growing again. RadioShack at this point is more a speculation than an investment.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days.

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12 Comments

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Eric

Radio Shack is a dinosaur. Best Buy is KNOWN for their extremely poor customer service. Radio Shack is where I went as a kid for batteries, patch cords and a/c adaptors. I get those mostly at Wal-mart now. I think Radio Shack will go first.

August 31 2014 at 6:38 PM Report abuse +1 rate up rate down Reply
Valerie

Who is this writer trying to kid??? Neither one of these companies qualify as a "good" investment choice. (Just throw your $$ into a lit fireplace, andy you will accomplish the same thing as paying money for poorly run companies like Radio Shack and Best Buy.)

Here's an investment tip everyone can really use --- if you are going to have trouble in your stock portfolio with poor performance, it will be from these three categories --- banks & other financials, retail stores, and tech. If you want to sleep well at night, don't buy stock in any of those three groups.

August 27 2014 at 9:28 PM Report abuse +1 rate up rate down Reply
keeslver

The Shack can not compete with Wal-Mart less Amazon. When consumer electronics was a TRS-80, they were the only game in town. They did not keep up withthe times. The compensation model for the Shack is also out of the 1950's.

I like Best Buy because they will price match Amazon. I prefer to buy local in case I need service. Try getting anything from Amazon after 30 days. Best Buy does have a problem with its employees. Best Buy attracts either the person who knows what they want or the soccer mom who needs help. If I know maore than the employee than I go somewhere else. I never let my wife shop for tech because she ends up buying whatever the sales person show her.

August 27 2014 at 8:09 PM Report abuse -1 rate up rate down Reply
mauriciolopezsr

All of You guys are completely off base!! The answer is they both will fold up, maybe not at the same time and most likely Radio Trash will close up first. It is ALL a game these "Company Builders" play and they got it down to the "T"; first they start owning ALL of the stock then they phony the books when they go thru the "expansion phase" when they are building hundred of stores Naitonawide, at the start the stock goes for abut $15/share when they need money to keep the ponzi scheme going they sell stock aroung $40/share to "new investors" usually institutional investors that manage Union Trust funds and the "invest" because it will generate jobs for their members in the store constructions; then the stock "peak at about $80 to $100/share and here is where they sell stock to the "Suckers" that believe that a company that import electrodomestic products from China; pulls then out of cardboard boxes and puts them in a show room for a small marginal profit can actually make money!?!?!? it is no different than 7/11 for crying out loud!! 7/11 manage to stay in business because thye are open 24 hours and people are willling to pay a few more for the convenience!! These guys obviously can't!
After they dump their $15/share stock for $80 to a $100/share and pocket all the profits, then is just a matter of waiting for the work force to start maturing as they mature they demand mare wages and benefits and it is time to "pull the plug" shut the company down sent all the 40 something employees to the unemployment line and start all over again with another compnay!! They are all in it, the Politicians knwo, the unions know, they know only the misinformed public does NOT knwo and for some reason they are so idiotic they can't figure it out, it is really simple: Nuilders Emporium, then Home Base, then Home Depot then Lowe's is just a matter of time bofore we got another name on the market!!

August 27 2014 at 7:07 PM Report abuse -3 rate up rate down Reply
rhv361

As a former 10 yr BB employee, very sad to see the changes and declines over the years in sales help and product selection. They insist on hiring 20-25 yr olds who don't have the skills and maturity to help the well heeled customers they need to retain to survive. What they are left with now is massive stores with far to much display space and not enough product to fill it. Only path for survival is to hire proffesional salespeople-upgrade to higher margin and higher end products and clean and tighten up store space.

August 27 2014 at 7:05 PM Report abuse +3 rate up rate down Reply
trammellfan

Best Buys return policies & the way the security act entering and exiting the store turned me off on them years ago. Hate to see Radio Shack go they seem to have what you need right now & remember when I was a kid going in there for a free battery every month.

August 27 2014 at 4:56 PM Report abuse +2 rate up rate down Reply
Gary Gierhart

Good buy Best Buy.........you need to go. Never will I buy anything from this store. The worst of the worst.

August 27 2014 at 4:35 PM Report abuse +1 rate up rate down Reply
ADAM ANTMAN

Radio Shack shot itself in the ass when it decided to rid itself of nearly everything but telephones. Stupid, stupid move.

August 27 2014 at 4:18 PM Report abuse +4 rate up rate down Reply
rgw

Not much hope for Radio Shack. There is no longer anything special about their stores except for electronics components for assembly geeks. Nice to have, but not enough volume potential. Best Buy lost their way long ago. Its pricing is nothing great. Even "sale" prices are really just typical street pricing. Amazing that they have cut back so much on accessory item inventory such as printer ink. The selection is minimal. Strange, since this should be a high margin item and a no-brainer to cash in on. Their computer service used to be very good and affordable. Now, they want an expensive contract just to look at an item. A guide to how to irritate and lose customers.

August 27 2014 at 3:50 PM Report abuse +2 rate up rate down Reply
R

Hope Best Buy goes first, though I think it'll be Radio Shack.
Went into Best Buy only once. Didn't like their policies or practices. Their sales associates were ill-informed on almost everything from a simple iron to a telephone to a microwave oven to a TV. Good riddance to Best Buy.

Am sorry that employees will lose their jobs.
Will be sad to see Radio Shack go.

August 27 2014 at 3:25 PM Report abuse +4 rate up rate down Reply