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TMCNet: Fort Worth Star-Telegram, Texas, Mitchell Schnurman column

[April 12, 2012]

Fort Worth Star-Telegram, Texas, Mitchell Schnurman column

Apr 12, 2012 (Fort Worth Star-Telegram - McClatchy-Tribune Information Services via COMTEX) -- Call it RadioShack's losing proposition: Give customers more of what they want and make less money on it.

Sales at the Fort Worth-based retailer rose almost 6 percent in the fourth quarter, thanks to hit products like the iPhone and iPad, and the rollout of 646 more mobile centers at Target. Verizon's strong wireless network also joined the RadioShack lineup.

All that should make for a happy story, except that the hottest mobile devices are delivering lower profits and spooking Wall Street. RadioShack's margin on an iPhone is about one-third the margin on a Blackberry, according to an analyst estimate.

So RadioShack's net income fell by nearly two-thirds last year, compounded by problems with Sprint sales. Operating income, at $155 million in 2011, hasn't been this low since 1996, when the parent company closed 17 Incredible Universe stores and 19 Computer City outlets.

No such extraordinary events account for the problems this time, and the troubles won't be fixed easily. That's why investors have been pounding the stock, sending it to a new low this week.

Blame it on the Internet, a merchandising strategy with too many me-too products, and a powerful array of rivals.

Imagine competing against the Apple Store and its Genius Bar for iPhone shoppers. And two weeks ago, Best Buy unveiled a plan to close 50 big-box outlets and open 100 small-format shops focused on mobile products. It appears to be gunning for RadioShack, with plans for up to 800 smaller units within three years.

RadioShack remains profitable, with plenty of cash on hand, and it's running lean as always. But the outlook has never been more uncertain.

With sharp sales declines in parts, batteries and consumer electronics, RadioShack is more dependent than ever on wireless.

"We believe the company is increasingly becoming a one-trick pony," Anthony Chukumba, an analyst at BB&T Capital Markets, wrote in February.

Wireless accounted for just more than half of last year's $4.4 billion in sales, compared with one-third in 2009.

With that shift, gross profit margins declined by almost 5 percentage points.

On Tuesday, RadioShack's stock price fell to $5.84 a share, the lowest since the early 1990s. Two years ago, it was $24. In the past 12 months, it's down 62 percent.

RadioShack hasn't simply observed the decline. In the past two years, the company spent half a billion dollars to buy back 27 million shares. It paid an average price that was three times higher than this week's low.

RadioShack's market cap is now $600 million. Pier 1 Imports, a Fort Worth neighbor that sells home decorative items, is valued at almost $2 billion.

By sales, RadioShack is roughly three times larger and has four times the number of stores. But the companies reported almost identical operating income in 2011.

The contrast between the two helps explain why some retailers surge while others struggle.

"Pier 1 has exclusive merchandise -- one-of-a-kind items designed for its customers," said Bradley Thomas, an analyst at Keybank Capital Markets. "Most people want to go into the stores and feel and touch the products. They usually can't go home and order them on Amazon." Mattress Firm, based in Houston, has a similar advantage, Thomas said. Most buyers want to get mattresses in a store, not online. This week, Mattress Firm reported a 41 percent increase in fourth-quarter sales and plans to buy Mattress Giant for $47 million.

RadioShack sells many commodity items that can be bought elsewhere, often through Amazon or its vendor partners. The management team, led by Jim Gooch, hasn't moved the needle with new, unique products or services. And as the analyst said, there's no evidence of another trick.

In the past, RadioShack enjoyed margins of up to 70 percent on some hard-to-find parts and batteries, because most companies didn't stock them. Today, those items can be found online at a discount and delivered in a day or two.

Cables for hi-def TVs used to fetch $40 in RadioShack stores, Thomas said. That's tough to compete with Amazon's $5 price.

Thomas estimates that Amazon often sells items for 15 percent less than most retailers, including the savings on sales tax. Even big-box giants are feeling the effects.

Amazon sales grew more than 40 percent annually in the past two years, and some of that came from RadioShack. Sales of parts and batteries, RadioShack's most lucrative segment in the past, declined by $230 million since 2009. Sales of consumer electronics, including camcorders and GPS devices, fell by $330 million over the same time.

RadioShack has more than made up the difference with wireless. Given the popularity of iPhones and iPads, that may well continue.

But until RadioShack has something special to offer, the more it sells, the less it will make.

Mitchell Schnurman's column appears Sundays andThursdays.

817-390-7821 Twitter: @mitchschnurman ___ (c)2012 the Fort Worth Star-Telegram Visit the Fort Worth Star-Telegram at www.star-telegram.com Distributed by MCT Information Services

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