RadioShack - Investors love Julian Day

I bought some January puts on RadioShack for 1.18/contract on December 12th. The stock was trading around $17 and Best Buy had just announced that earnings were pressured due to low margins caused by price competition. I’m not the hugest fan of Best Buy, but their price and selection is pretty great. If they are seeing margin problems, I started to think about what other players would be affected. Circuity City seemed like a likely candidate, but, after having shopped in both stores, I could see the benefits of each. Checking out the “Competitors” section on Yahoo! Finance, I spotted RadioShack.

I’ve been an occasional customer of RadioShack all my life, but it certainly holds no special place in my heart. I see their greatest strength as having a large number of stores in small neighborhoods and small towns. Seems that most places I’ve lived, there has always been a RadioShack within a few miles. Ten or fifteen years ago, RadioShack was still in a pretty good position. Big box stores were still seldom found in towns smaller than ~50,000 people, the level of knowlege of the average Joe in regards to electronics was still fairly low, and RadioShack could offer a decent selection of products across the board.

In the last ten years, things have changed. At least out here in the Pacific Northwest, one is hard-pressed to find a place that is more than an hour from a big box electronics store like Best Buy, Circuit City, Comp USA, etc. Home electronic “necessities” like stereo’s, cordless phones, digital cameras, DVD players, etc are easily available from general discounters like Target, WalMart, Fred Meyer, KMart, etc.

What has RadioShack done to adapt? From my impression, very little. I still go to RadioShack every once in a while, usually for odd electrical components (that are becoming harder and harder to find may I add), and I’ve seen what the stores have to offer. Cell phones? You bet. Mid-level stereo components? Sure. A decent selection of basic TVs and telephones? Indeed. Anything special, catchy, hip, out of the ordinary? Nope.

Consumers are getting much more savvy when it comes to purchasing electronics. People are very willing to shop around. Smaller items can easily be bought online. Larger or more expensive items usually require some research and price comparison which can be done online and usually results in the lowest price being found at one of the big box stores. I really don’t see how RadioShack can survive. Increase margins all you want by cutting costs, but costs can only be cut so low. Prices can be kept slightly above the competition due to convenience, but they still have to be in the same ballpark. RadioShack stores have no ability to offer a significant selection of products as they are too small.

Julian Day is running the company now after the ouster/resignation of its prior CEO. Julian Day is an excellent executive known, most recently, for his turnaround of Kmart. Investors seem to love Julian Day. The stock surged the day the announcement was made that he was taking the helm. Despite his reduction of transparency by ending quarterly conference calls, the stock price remains strong. Cash balances are increasing, margins are improving, but store sales numbers are dropping rapidly. I don’t think its sustainable. Turning around a chain such as Kmart seems like a very different beast to me. Kmart can be cost competitive due to its size, Kmart can offer tons of selection due to the square footage of its stores, Kmart can learn from its competitors and maximize the efficiency of its supply chain which will cause profits to skyrocket due to the sheer quantity of product that they ship. In my opinion, Kmart was a broken company. Fix the company and Kmart can shine again.

RadioShack is a broken business model, and that is much harder to fix. I bought puts in this stock and lost money, but I don’t think I made an error in judgement, I just bought puts with an expiration date too near in the future. The stock is going to bounce around over the coming year or so, but this company seems destined for either failure, or a major overhaul of its business model and image. Neither of which are going to offer any decent returns for years.