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RadioShack a Penny Stock Now, Recovery Jeopardized

Zacks Equity Research

RadioShack Corp. (RSH), the beleaguered electronic and mobile products retailer, faces further trouble. On Jun 20, 2014, the company suffered a major blow as its stock price fell below $1 (and closed at 92 cents) on NYSE. This happened for the first time in the company’s history.

The $1 price tag generally acts as a psychological barrier for any stock. The NYSE has the right to delist a stock if it closes below $1 a share for 30 consecutive trading sessions. Although the stock can still trade in the over-the counter (OTC.TO) market, several industry experts believe that RadioShack is likely to face Chapter 11 Bankruptcy proceeding.

RadioShack’s coreconsumer electronics (including digital TVs, digital music players, and digital cameras) retail business is on secular downtrend and is unlikely to recover in the near future. Further, the customers are increasingly opting for online purchase instead of visiting brick-and-mortar retail stores.

Loss of foot traffic is taking a toll on RadioShack’s mobility business, on which the company was banking for its future growth. Moreover, majority of consumer’s are switching to low-margin tablets and smartphones from high-margin computers and cameras. 

RadioShack has undertaken several strategic moves to make a turnaround. Management is focusing on reducing costs, which includes closing up to 200 stores every year over the next three years, lowering rent expense through negotiations with landlords, reducing compensation expense by optimizing labor hours and store operating hours, and reviewing other expenses for cost-reduction opportunities.

Unfortunately, none of these methods has produced any effective results. At present, major concerns for the company are its decreasing liquidity, widening losses and disagreements with its lenders over the store closure plan.

Recently reported first quarter of fiscal 2015, RadioShack’s revenues declined 13%, gross profit dropped 21% and adjusted operating loss soared by a whopping 700% from the prior-year quarter. At the end of the quarter, the company had just $62 million of cash and $1.2 billion of debt and short-term liabilities.  

Moreover, comparable store sales for the company-operated stores and kiosks (stores and kiosks that have been operational for at least a year) were down 14% in the last reported quarter. This is a key retail performance indicator measuring growth from the existing sales locations. The stock price, which had plummeted 79% in the last year, witnessed a decline of nearly 40% in the last 10 days.

Furthermore, RadioShack is facing intense competition from larger rivals like Best Buy Co. Inc. (BBY) and Wal-Mart Stores Inc. (WMT). Best Buy is gradually rolling out small mobile stores. Best Buy plans to open 600 to 800 stores within five years, which in turn, will negatively impact RadioShack’s market share. RadioShack is also facing stiff competition from online retailer, Amazon.com Inc. (AMZN). RadioShack currently carries a Zacks Rank #4 (Sell).

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