Options: ASE, CBOE, P Analysis prepared by Michael Souers on November 05, 2007, when the stock traded at $ 19.30. Highlights ➤ We project that sales will decline 3% to 4% in 2008, following an 11% drop in 2007. We expect RSH to continue to focus on increasing prof- itability by closing underperforming stores. We also look for kiosk expansion and RSH's more recent focus on faster-moving categories- -such as MP3 players and digital cameras--to partly offset lost sales from anticipated store closures and weakness in wireless within RSH's core retail operations. We expect comp- store sales to decline in the low single-digits. ➤ In spite of continued expected same- store-sales declines, we expect that RSH's cost-cutting initiatives will result in a slight widening of operating margins, following signif- icant projected margin improvement in 2007. However, we think that RSH will struggle to achieve historical gross margins going forward due to the company's focus on faster-moving, but typically lower-margin, categories. ➤ After taxes that we forecast at 38.0% and a slight decline in net interest expense, we project operating EPS of $1.65 in 2008, a 2% in- crease from the $1.62 we expect the company to earn in 2007, excluding one-time items. Investment Rationale/Risk ➤ We view the company as in the early stages of a potential turnaround plan, which is focused on increasing average unit volume, rationalizing its cost structure, and growing profitable square footage. While RSH's CEO has extensive retail experience with turnaround situations, we think the longer-term outlook for the compa- ny is uncertain, due to a highly competitive en- vironment that includes behemoths Best Buy (BBY: strong buy, $47) and Circuit City (CC: buy, $7). Given the company's lackluster sales growth, we believe the risk/reward quotient for owning the shares is neutral, with the stock re- cently trading at about 12X our 2008 EPS esti- mate, in line with peers. ➤ Risks to our recommendation and target price include management's inability to rapidly exe- cute its turnaround plan, and macroeconomic factors that could result in weaker than antici- pated consumer spending levels. ➤ Our 12-month target price of $22, or about 13X our 2008 EPS estimate, is derived from our dis- counted cash flow analysis. Our DCF model as- sumes a weighted average cost of capital of 10.2% and a terminal growth rate of 3.0%.
Radio Shack business situation as of 09/30/07 by john morgan 1-Oct-07 11:11 am
>> Radio Shack is working on a long term plan (3 to 5 years)with Julian Day who has had some success in the past, turning around companies. BUT that does not mean he can do it again, only time will tell.
Think like a Wall Street money person. The standard turn around business plan is to cut costs, put the "right" products into what is left of the footprint and then sell, sell, sell. Usually, this takes 3 to 5 years. In a public company the senior management also has a legal responsibility to try and make a profit for the share holders, which makes the way the cuts are implemented, very tricky.
Today, Radio Shack is in the "black hole" of the early stages of the classic turn around process. At store, district and area levels, with the day by day push for sales and the resulting commissions , bonuses, spiffs as well as the physical operation of the stores, it maybe impossible to have the time to step back and look at the situation from the view of senior management and the big players on Wall Street. BTW, senior managment and the Wall Street types, are just as "busy" as anyone else and don't usually have the time to try and think like the "troops" on the front lines in the stores.
The footprint of the stores fits some products which have enough margin to make everyone in the channel enough money to stay in business. These new products will begin to show up in the stores next year.
Add to all of the above, all of current the sub-prime issues,timing and methods for the turn around may be altered. At store level the sub-prime issues reduce traffic and the amount discretionary money the customers that do come in, have to spend.
In the next several quarters it will get worse for everyone involved. After that, the turn around can start but it will create more "pain" in the beginning.
If there are no terror attacks or major natural disasters, the turn around plan is sound and the stripped down organization can execute the plan, everybody makes money.
It is too soon to know exactly what the timing and plan will be and therefore too soon to know if Radio Shack will come out the other side of the "black hole" it is in now, a winner or loser. <<