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RadioShack is No Longer a Parts Retail Box

July 20, 2012 | About:

RadioShack continues to get cheaper and cheaper, but in the case of RSH, whether there is value is a different story.

Consider this.

RadioShack has seen most of the growth in its business coming from sales of prepaid and postpaid mobile phone and receiving commissions from sales.

By reading the 2010 and 2011 annual report and the latest quarterly report, it becomes clear that RSH strategy is to transition itself into a national licensed seller of mobile phones, wireless devices and accessories.

Proof is in the numbers. The Mobile business accounted for 51.4% of net sales in 2011, up from 44.2% in 2010. Clearly, RadioShack is no longer an electronics and parts retail store.

Mobile Kiosks are Not a Long Term Strategy

Since 2009, RSH started testing and rolling out kiosks selling phones in Sams Club and the company is now opening up kiosks exponentially within Target stores.

In 2009, RadioShack had 104 Target kiosks, 850 in 2010 and 1,497 as of March 31, 2012.

These kiosks are doing well and adding to revenue, but whether this can translate to long term cash flow is a different story.

Keep in mind that these kiosks are tiny. Only 16 sq ft so the capital expenditure required is minimal, however, kiosks are not long-term solutions. They are literally mobile phone tents.

The only competitive advantage that RadioShack cites regarding this strategy is that they are “convenient”. Convenience is not a competitive advantage unless it is done like Walgreen.

How will RSH Handle Mobile Competitors?

More problems are going to arise as competitors with deep pockets march their way into the market in creative ways.

Apple attracts heavy traffic to their stores where they sell a ton of iPhones. Microsoft also has their own stores where they sell Windows Mobile phones and Samsung will also open their first branded store in Burbandy B.C., Canada, offering a wide variety of Android phones. But wait, there are rumors that Google will do the same.

And that’s going to be a problem.

Apple and Samsung are number 1 and 2 in the smartphone industry, with strong brand recognition. Google has the highest market share of the smartphone OS and I’m sure their stores will be a lot of fun too.

How will RSH handle its competitors?

Gross Margins an Indications of Things to Come?

Gross margins will continue to drop as smartphones carry a lower gross margin. TTM gross margins has already declined another 1.3% and is now at 40%. The lowest it has ever been in over 10 years. I fully expect further gross margin erosion. 40% still is too high for their new business strategy.

It’s difficult to see whether RadioShack will succeed as a business, and I’ll get to a full valuation next week.

Next week, I’ll go through the numbers to see whether RadioShack is a value trap or unbelievable value. After all, RadioShack is now a Graham net net.

I’ll leave you thinking about RadioShack’s business model over the weekend along with this companion stock valuation spreadsheet in PDF with all the numbers.

Disclosure

None

About the author:

Jae Jun
Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.

Visit Jae Jun's Website


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