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RadioShack May Never Get it Right

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RadioShack Announces Its Closing Over 1,000 Stores
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Shares of RadioShack (RSH) took another hit on Tuesday, slammed by yet another problematic quarter. Revenue plunged, fueled by a 14 percent drop in same-store sales. Its adjusted operating loss from continuing operations nearly quadrupled.

You won't find too many retailers posting double-digit declines at the individual store level. And you'll be hard-pressed to find chains doing so on cascading gross margins with red ink expanding.

RadioShack is in trouble, and the once popular small-box retailer is running out of chances to dig its way out it.

Herding Scapegoats

RadioShack argues that an "industry-wide decline in consumer electronics and a soft mobility market" put the strip-mall chain in a tough spot. However, that makes it seem as if these are circumstances beyond its control, which is not entirely accurate.

It's true that many retailers are struggling, but none of its competitors is faring as poorly as RadioShack. Best Buy (BBY) saw its consumer electronics comps slide 4 percent, but its mobile sales improved at the store level. Smaller big-box chain Conn's (CONN) fared even better. Same-store sales for consumer electronics rose 3 percent.

There might be an industry-wide decline in consumer electronics, and smartphone sales growth is decelerating. This still doesn't explain why the average RadioShack store is selling 14 percent less than it did during the same quarter a year earlier.

Small Box Getting Smaller

There was a time when RadioShack was buzzing. It was the place to get Tandy computers, blank media and hard-to-find components. Rent was cheap for its bite-sized stores in neighborhood strip malls, making RadioShack one of the more profitable chains out there.

A lot of trends have been working against the now-profitless chain. Media has gone digital, and cloud storage has made blank media less popular. Amazon.com (AMZN) may not have the instant gratification factor down pat, but its deep savings and even deeper catalog have been monumental in driving traffic away from RadioShack.

RadioShack's response was to double down on mobile. It would become a one-stop shop, stocking all of the hottest phones across most of the leading carriers. This would seem to be a smart strategy. Even Best Buy decided to open up dedicated Best Buy Mobile stores to address this market. However, too many smartphone owners simply upgrade directly through their carriers.

There was also a backlash against devoting more of its limited store space to mobile products. An emphasis away from traditional consumer electronics probably pushed away its already thinning base of loyal customers, and mobile products don't lend themselves to the kind of repeat purchases as its original core business.

Carousel of Progress

"We are making progress on our turnaround strategy," CEO Joseph Magnacca said on Tuesday. It's hard to call cascading sales, thinning gross margins and mounting losses the signs of success, but RadioShack isn't going to give up.

RadioShack may have $615.4 million of debt on its balance sheet, but it still has $361.9 million of untapped credit. In short, it's not going anywhere in the near future despite eyeing what should be its third consecutive year in the red.

RadioShack's hoping that new products will bring "differentiation and newness" to its stores through high-margin private label and some exclusive merchandise. Wait a minute. It wants to be Sharper Image now? Along the way, it's closing down stores, with plans to shutter another 200 locations this year.

The chain may be hoping to return to its glory days of the 1980s, but the changing marketplace will make living in the past more dangerous than it seems.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and owns shares of Amazon.com. Try any Motley Fool newsletter service free for 30 days.

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Eric

What a shame. Radio Shack was an iconic brand for so many years...

June 11 2014 at 5:53 PM Report abuse rate up rate down Reply