RadioShack Corp. (NYSE:RSH) is up over 10% the last few days as Bank of America increased their rating on the stock from ‘underperform’ to ‘buy,’ as well as upping its price target from $2 to $2.50, versus the current trading range around $2.30. Although this upgrade has driven the stock price up, we believe there are still concerns with the company. While sales are expected to rise 1.1% in 2012, with growth in mobile computing accessories driving sales, this can only offset the overall decline in consumer electronics for a limited time. The other pressure on RadioShack is a product mix shift to smartphones that carry much lower gross margins.
Also, the company’s CEO recently stepped down. Given RadioShack’s recent operating performance and stock decline the move comes as little surprise. S&P Analyst Alan Rifkin cited the CEO departure as a net positive, one that will give the company an opportunity to address the need for a new strategic direction.
Although the demand for consumer electronics is expected to remain strong, the issue is where consumers are getting their electronics. The Consumer Electronics Association forecasts a 3.7% increase in consumer electronics growth in 2013, with hot products such as tablets and smartphones driving demand. Competitors within the industry rely on product mix and price differentiation, but Internet retailers are offering a greater produce selection at better prices.
One of RadioShack’s key initiatives is to improve the profitability of its Target Corporation (NYSE:TGT) mobile business. The business segment has been unprofitable year to date, but RadioShack aims to optimize hours based on traffic and peak hour trends, in an effort to make the segment profitable by year-end. One interesting question is whether Target would consider purchasing RadioShack. RadioShack has a market cap around $230 million, while Target has cash and short-term investments in excess of $1 billion.
Target did consider the purchase of select Sears mall locations, but eventually decided to purchase their own mall store real estate. We see Target buying RadioShack as very unlikely and note that RadioShack’s Target Mobile segment lacks the profitability benefit of mobile attachments and accessories. RadioShack has also noted that it will review the partnership and have the opportunity to exit it in the second half of the year if the deal is not beneficial to both sides.
RadioShack continues to see brick-and-mortar competition from Best Buy Co., Inc. (NYSE:BBY) and GameStop Corp. (NYSE:GME). The Best Buy stock price roller coaster continued in part this week, as the stock is up over 4% in the last few days on news that founder Richard Schulze is still working on a possible buyout deal. Reuters reported that he and at least five private equity firms are examining the company’s books. Best Buy has seen a number of insider purchases—including the most recent purchase by a board member. Best Buy also had some top name fund owners owning the shares at the end of 2Q, including Ray Dalio, Steven Cohen and Ken Griffin—we also believe some funds are betting on a takeover.
GameStop, the video game retailer, is expected to see 2013 revenue down 6%, as sales of new game hardware and software show weakness. One bright spot for the company, especially in the current economic environment, is the company’s used game business. The video game industry is seeing challenges in the short-term, but as new hardware offerings come to market the company should show positive performance in the future. As a result, GameStop does trade at the premium to RadioShack and Best Buy, with a P/S ratio over double the other companies.
All the retailers are seeing immense competition from online retailers, including Amazon.com, Inc. (NASDAQ:AMZN). Amazon is up over 40% year to date on strong performance, including strong electronics sales. Net sales are expected to be up 31% in 2012 and 28% in 2013, driven by continued market share gains from traditional retailers. EPS growth is expected to be up over 150%; from 2012 expected EPS of $1.01 to 2013 expected $2.75. However, Amazon trades over 90x 2013 estimated EPS and may face headwinds with it ability to meet high growth expectations.
RadioShack saw mixed feelings from funds during 2Q. The top fund owner, Arrowstreet Capital, upped its stake by 36% to 1.8 million shares; however, other top firms AQR Capital and Jim Simons were dumping their stakes, 45% and 51%, respectively.
We do not see the major electronics retailer, Best Buy, finding a compelling reason to purchase RadioShack, as the company has its own turnover issues, as well as the potential that it is taken private. Target is already seeking to gain a competitive advantage over its top competitor Wal-Mart with a RadioShack partnership, but we do not see any benefit to Target beyond this relationship.
Amazon has an initiative to open its own brick-and-mortar stores and would likely gain little benefit from purchasing RadioShack. GameStop would gain a new market and product mix with a RadioShack acquisition, and GameStop is nearly ten times the size of RadioShack on a market cap basis. However, we believe that with a closer look, a RadioShack acquisition may be ill-advised.
RadioShack’s signature products—batteries, earphones, cables and accessories—have been in decline. These signature products account for more than 50% of the company’s gross profits. 2Q sales were flat in this segment, and on an annual basis, the category has declined each year since 2009. There’s nothing to attractive about the company from a competitor’s perspective.
