Thursday, March 6, 2014

Waving the White Flag on RadioShack

I think new management at RadioShack has the strategy right. They are testing out various configurations of different categories and labour models at a few concept stores, and rolling out the successful learnings to the rest of the store network. They are shutting down the least profitable stores, and cutting overall expenses. They are introducing new products (e.g. 3D printers) in an attempt to break reliance on declining categories. The problem is, it is taking too long.

As a result, I sold my shares of RadioShack at a loss this week after reading through their most recent results. While I think they have a reasonable chance at turning it around, I'm not willing to take that chance considering the company's financial position. Management has pushed the company's obligations out a few years, but now it appears it will take years just to figure out if the turnaround will be successful. That means if the turnaround is not successful, bankruptcy is likely, and I don't want to take that risk.

The concept stores, while they are apparently showing strong sales results, are still not profitable! (I'm inferring this from the conference call. As an aside, I'd have loved it as an investor if the company would break down just how the concept stores are doing, but I understand for competitive reasons why they would not want to.) This means not only is there still a lot of work to do within the test stores and with the product selection, but it will take even more time to propagate these changes out to the rest of the network.

If RadioShack instead had a net cash position, like let's say Best Buy does, maybe I would feel a little bit more protected on the downside, as the company would have more time to get it right. But it doesn't! What used to be a net cash position has become a growing debt position, with no relief in sight.

As such, RadioShack becomes the first company of 2014 to join my list of Value Fails. Next time you see me making a mistake, please talk me out of it!


Gregg said...

I'd be surprised if they survived. Just the name RadioShack gives people bad memories such as being asked for all your personal information just to buy some batteries. They wasted a bunch of money on a Superbowl commercial to remind people of how outdated their store model is and forget to tell people why they should go now. I'm not sure what RadioShack can offer in their stores that would make people choose them over Walmart, BestBuy, Amazon, etc.

Varadha said...

Karsan, You may want to look at if the industry of the company under purview is structurally changing. That is one of the reasons why you get trapped for value. When a company's RoCE is falling continuously, "denial bias" forces existing management to pump money to make the business work somehow. Sort of filling up more fuel into a car whose engine is broken to make it go faster - take a step back and you will see the truth !

Anonymous said...

Well done exiting on RadioShack before their decline into bankruptcy.

Saj- I continue waiting for your surrender on Blackberry. I commented a long time ago that the original value thesis is no longer existent and, although a new value thesis may have arisen - the original value thesis was a fail.

Further, the opportunity cost of holding on - for years now - has been extraordinarily expensive. Although it's an implicit cost, this opportunity cost has added to your explicit breakeven price. That said, I think Blackberry would be a great acquisition for Microsoft, Amazon or others with a broad ecosystem of products/services that would complement Blackberry's offering. If that's your hope, then I understand holding on (although, again, the opportunity cost while waiting for a speculative acquisition seems quite high).

In any event, this is friendly banter and I look forward to your thoughts.

As always,

Saj Karsan said...

Hi BF,

You're absolutely right that the original value thesis failed. I'll move the "analysts were right" article to the Value Fail page.

I think Blackberry now is very much like IBM was when the mainframe became obsolete. Management skill is very important to get Blackberry to shed business lines and focus and execute on the right areas going forward.