RadioShack: Turnaround Story?
When was the last time you went to RadioShack? Odds are your most recent electronics shopping spree ended at a big-box retailer like Best Buy, Circuit City, Costco or Wal-Mart. RadioShack chief executive Julian Day wants to change that trend by moving stores to better locations, selling the most popular electronic goods and cutting overhead costs to better compete with the larger chains.
Time will tell if Day's strategy will work, but he has a vote of confidence from Goldman Sachs analyst Matthew Fassler, who calls RadioShack "a classic turnaround opportunity." The stock (symbol RSH) surged 5% on January 30, to $21.86, after Fassler upgraded RadioShack to buy from hold. Based on his expectation that the electronics merchant will slash costs, Fassler raised his 2007 earnings estimate from 95 cents a share to $1.20. On average, analysts expect RadioShack to earn 91 cents a share this year.
The bullish case Fassler makes for RadioShack hinges on Day's ability to revive moribund retailers. As chief financial officer for Safeway in 1990s, Day contributed to the grocer's turnaround. First at Kmart and then at Sears Holding after the discounter acquired Sears and assumed its name, he breathed life into the companies by shedding unprofitable lines of business, cutting costs and reinvesting in operations that generate more profits. Day has proposed a similar course since joining RadioShack last summer. The Fort Worth, Texas, company plans to close 700 stores, launch a kiosk business that sells wireless phones and hawk more big-ticket items, such as digital cameras and MP3 players, at its stores.
Fassler's endorsement of RadioShack comes with some caveats. He worries that the company's decision to pursue "low-hanging fruit" of fast-selling consumer electronics is a mistake. These electronics don't generate as much profit as RadioShack's traditional stronghold in the likes of connectors, plugs, adapters and batteries. "Unfortunately, this low-hanging fruit is much like Forbidden Fruit -- very much accessible, always tempting, but not terribly good for you," says Fassler. Nevertheless, he thinks Day will abandon money-losing businesses and pursue those that offer the most bang for the company's buck.
Despite a solid track record, Day has yet to prove himself at RadioShack. The changes he wants to make will take years to affect earnings. And signs of improvement won't be clear until the company reports fourth-quarter earnings in February. Until then, a RadioShack comeback is just speculation.
After the January 30 surge, the stock is hardly a bargain. It trades at 24 times the average analyst earnings estimate for 2007. Fassler thinks the shares could be worth $25 in 12 months. But you might wait until the stock is cheaper to bet that Day's strategy will make RadioShack a winner.