Sunday, June 15, 2014

More On Radio Shack: Liquidation Analysis, How Many Stores Are Too Many, What's The Competitive Advantage? $RSH

I put together a simple recovery model for the Radio Shack bonds, which is obviously a moving target or melting ice cube, but worth playing with some assumptions.

The book value of assets was $1.33 billion at the end of the most recent quarter, but if you apply haircuts and assume they will use up all of the cash (and then some) there is might be about $600 million in realizable value. (Because so much of the assets are inventory or, even worse, the store fixtures and TIs.)

So secured debt is (currently) covered about 2x, but that will get worse as they lose more money, and the ~$950 million in remaining unsecured debt, payables, and expenses look to recover about 32 cents on the dollar.

There are three additional downside risks that this model does not consider. Obviously, they could burn even more cash and value through operating losses. The amount of inventory available to satisfy unsecured creditors could  be worse to the extent that vendors are able to reclaim inventory. And then this model  assumes that there are no lease rejection claims. The bankruptcy code is not very generous to landlords and I wonder if the above/below market leases would essentially net out?

The recovery CDS is trading for 20/25 I heard which sounds pretty fair given some more lost value through the rest of the year.

Big conclusions I see: bonds are overpriced but not a total zero, stock will be a zero, and vendors are crazy to be shipping them any product.

A correspondent writes in,
[The bonds] do sound overpriced, and the vendors have to be getting nervous.  What you know is that the place is losing a lot of cash everyday at this point.  Something has to break the impasse with the lenders, if the lenders don’t budge either the management will choose bankruptcy to maintain salvage value or the vendors will cut them off to avoid being the lenders of last resort.

I haven’t seen any analysis of the real estate and what kind of value or claims might be there.  Given the breadth of their footprint, you would have to assume that some meaningful number of the leases are in the money.  It wouldn’t shock me if they tried to shrink down to half or quarter size and tried to continue as a going concern.  There have to be small towns and other locations where they are the only game in town or a much more convenient location than a distant mall.  If they can get the assortment right, there might be something viable.  This idea of appealing to the maker community and selling stuff from start ups makes some sense to me, I just don’t know how big that market is – and it seems like they are running out of runway to give that a chance of succeeding.

It also wouldn’t shock me to see someone make a bid for a portion of the locations – just to buyout the leases.  GME has a plan to open 250 stores selling phones and other things – they have a deal with ATT to sell their prepaid brand.  Maybe Sprint or T-Mobile could improve their distribution with some of the locations – don’t really know, but Son doesn’t seem bashful about spending money.  This is kind of interesting:  Perhaps it only works because it has a carrier as the anchor vendor in the store, or maybe Canadian retail is sufficiently different (have to be a lot of small, remote towns up there) that it wouldn’t work here, but they seem to be making the general concept work.

There is one of their new concept stores about a half mile from me that I was in recently.  They are still trying to sell TVs in these places.  Who are they kidding?  They had one 50 inch TV in the display, and a sign that said “ask us about other TVs we sell”.  Really, when you can walk into Best Buy and see 50 of them in their true color and sound and all shapes and sizes.  At best, they might find a niche selling very small screen TVs that most of the other stores don’t want to carry (and which Radio Shack did a while ago).  It is still a phone dominated merchandise set.   They also had a lot of floor space devoted to Beats.  Hard to see that ending well when Beats hits the Apple store.
We were also talking about how the company has gotten into its present situation,
"The history of the company is pretty telling.  The original Tandy corp itself has a pretty weird history and sounds like it was run by a bit of a Texas Wildman.  But the original Radio Shack started as a ham radio store for hobbyists and the radio operators from ships (first store was in Boston).  Then they got into hi-fi music products and eventually began selling their own products, and I think that was a key part of the culture of the company, it seems like there was a nerd element to the business that liked gadgets, and when you think about things like the TRS-80, they were really ground breaking products at the time, and importantly they controlled their own products.  But once the PC business standardized around the IBM architecture, it became hard for them to compete, though it sounds like they were a factor in the early cell phone business, not sure if they made those or if they were OEMing someone else’s.  They also apparently did well with consumer walkie talkies over unlicensed spectrum – sounds like that was the 80s too.

So here is where I think the story starts to unravel.  Charles Tandy dies in 1978.  So then check out this series of events and  CEOs that followed in his wake:

Tandy left and estate of over $28MM, mostly in common stock, to his wife and the Tandy Foundation (don’t know how much of the company he owned at the time, but if the trustees of the foundation had any big role at the board level, that was probably the kiss of death for the company, would be interesting to go back and see what the board and management looked like after he died) (most of this is from Wikipedia)

In 2000, the company-owned Realistic and Optimus brands were discontinued when the company entered into an agreement to carry RCA products, although RadioShack had not made products under the Realistic name since the early 1990s [I think this is where business model really changed and the guys running the place weren’t the gadget guys anymore]

In 1993, Len Roberts became president of Radio Shack. He had previously spent more than 20 years in the food industry, beginning with Ralston-Purina

David J. Edmondson, [joined the company in 1994 as a marketing executive, after 11 years at ADVO, a direct mail company, prior to that he was at a telemarketing firm, and previously was a Baptist minister,  His tenure at RadioShack was marked by establishing] powerful strategic alliances with major technology suppliers, including IBM, Compaq, HP, Sprint PCS, Verizon Wireless, Cingular Wireless, Microsoft, RCA, Dish Network, Sirius Satellite Radio, and Apple. These powerful alliances, along with the development and execution of “store-within-a-store” concepts and “residual income” business models, contributed billions of dollars in revenue and profit to the company throughout his career, and become CEO in 2004.  On February 20, 2006, the company announced David Edmondson had resigned over questions raised about his résumé.

In wake of Edmondson's absence Claire Babrowski acted as CEO, chief operating officer and president for RadioShack. She had just joined several months prior, after spending 31 years employed with McDonald's Corporation

On July 7, 2006, RadioShack's board of directors announced it had chosen Julian Day (then aged 54) to serve as chairman and chief executive officer of the company. Day had previously served in senior leadership positions at several large publicly traded retailing companies in the US and had played a key role in revitalizing such companies as Safeway, Sears and Kmart. Day had financial experience, but woefully lacked any practical front-line sales experience needed to run a retail company. Day's tenure lasted 5 years; he resigned in May 2011

Day's successor, Jim Gooch, stepped down as CEO of the company and resigned his position on the Board on September 26, 2012 [he had been the CFO of the company and had spent most of his career in various financial and control positions at Sears and Kmart]

On February 11, 2013, RadioShack Corp. hired Joseph C. Magnacca as its CEO, tapping a drugstore marketing expert

So the experience base of the CEOs post-Tandy were, in order, dog food and cereal, telemarketing and direct mail, fast food, supermarkets and department stores, department stores, and drug stores.  Where are the guys that actually know anything about electronics and technology?  Also note that the “residual income business model” virus got planted in the DNA of the company in the late 90s by a marketing guy and sounds like it has dominated their thinking since.

Also, this is pretty interesting – sound familiar?

In 1994, the company introduced a service known as "The Repair Shop at Radio Shack", through which it provided inexpensive out-of-warranty repairs for more than 45 different brands of electronic equipment.[16] The company already had extensive parts warehouses and 119 regional repair centers, and hoped to leverage these to build customer relationships and increase store traffic. Len Roberts estimated that the new repair business could generate $500 million per year by 1999

In early 2004, RadioShack introduced Fix 1500, a sweeping program to "correct" inventory and profitability issues company-wide. The program put the 1,500 lowest-graded store managers, of over 5,000, on notice of the need to improve. Managers were graded not on tangible store and personnel data but on one-on-one interviews with district management.[18]

Typically, a 90-day period was given for the manager to improve (thus causing another manager to then be selected for Fix 1500). A total of 1,734 store managers were reassigned as sales associates or terminated in a 6-month period. Also, during this period, RadioShack canceled the employee stock purchase plan. By the first quarter of 2005, the metrics of skill assessment used during Fix 1500 had already been discarded, and the corporate officer who created the program had resigned.

Note also all these efforts to diversify, or adapt to the changes in consumer electronics after Tandy’s death.  A lot of this seems me too/reactive.  None of it went anywhere it seems:

In 1985, Tandy acquired two chains, McDuff Electronics and VideoConcepts. Most of these stores were closed as part of a 1994 restructuring plan, with 33 converted to RadioShack or Computer City Express stores.[7] Remaining McDuff stores were closed in 1996.[8]

The Edge in Electronics, a now-defunct chain of boutique stores geared toward mall customers interested in fashionable personal and portable name brand electronics, debuted in 1990 and had 16 stores as of December 1993. One of the last stores open closed its doors in San Antonio TX in 2001.

The Incredible Universe concept was Tandy's attempt to compete with other electronics giants such as Best Buy and Circuit City; the first two stores, located in Arlington, Texas andWilsonville, Oregon, opened in 1992. Each Incredible Universe store stocked more than 85,000 items, and the stores' sales personnel did not work on commission. Sales were below average compared to Tandy's profitable RadioShack line, and by late 1996, the company had decided to sell or close all 17 Incredible Universe stores.[9] Many Incredible Universe stores were acquired by Fry's Electronics.

Computer City was a supercenter concept featuring name-brand computers, software and related products; by the end of 1993, Tandy had 40 locations, including three in Europe. The Computer City stores were later sold to CompUSA.

Really seems like the company has been adrift for almost a decade and has been trying to figure out how to adapt to a world where it sold products it didn’t make for the last two decades.
I was wondering if losing the joint venture arrangement with Target stores was a blow, but our correspondent writes,
"I remember listening to the calls immediately before and after this. The problem was they were getting the phone sales, but not making very much on that and Target was skimming off all the accessory sales where all the margin was and it was probably taking some traffic out of their own stores. They were losing their asses on those kiosks. That hastened the bankruptcy by a year or two I’ll bet. It is worth going back and skimming those transcripts. I think it fits with the bigger theme of them casting about for a path to growth and profits.  They never found it."
Asking our correspondent what he would pay for a controlling stake in Radio Shack right now, today:
"I wouldn't pay a dime for the equity, it would have to be the secured debt or a deep deep discount on the unsecured if I could convince myself the values were there.

I would first look at which stores were 4 walls profitable and then look at which products were really making money, and scale it back to those things.

I'd think about partitioning the store base by the demographics of the neighborhoods, and think about trying different formats for the stores depending on where they were located - would have to think more about that, but I'll bet they haven't segmented very much by demographic groups.

One thing I would try is to put a bunch of leading edge stuff in at least some of stores, like 3D printers, Google Glass, Nest thermostats, maybe Warby Parker glasses, home automation stuff, maybe set up a section in the store that was part wifi/recharging lounge, part how-to center where interest groups for leading edge stuff could meet to do demos and instructional sessions.  I don't know if there is a critical mass of merchandise big enough to make a business out of that, but I'd look to get out on the leading edge of consumer tech and design, kind of an Apple store for all the cool stuff Apple doesn't sell, and give it a communal element, probably target it at the millennial demographic.  I don't know if their locations are compatible with that kind of a strategy or not, would have to look at the demographics of their market areas.  Maybe the urban ones would fit that, probably not suitable to the whole footprint.  Just think they need to pick a demographic group that they want to own with a product assortment that provides differentiation."
Another one of the Radio Shack business model problems - and I believe that there are many - is that they have just too many stores. Here are all of the stores in the Phoenix metro area, for example:


I count 38 stores which is about one per 110,000 people. Radio Shack has approximately 4,300 stores in the U.S. which is one per 73,000 people. An even higher density than what you see in the map above.

Just to compare with other retail chains. Starbucks has about 11,000 stores in the U.S. - less than three times as many as Radio Shack!

Another correspondent writes in about Radio Shack management,
"Probably no members of RSH upper management ever held a soldering iron. The development of integrated circuits based on transistors doomed hobbyist electronics.

Radios based on transistors were first marketed around 1957. The oldest executive at RSH probably is less than 65 years old, meaning that he was born in 1949 or later. So circuits have become more and more massively integrated, all of these RSH executives' adult lives.

Hobbyist electronics means the assembly of large-sized individual components, such as vacuum tubes, resistors, capacitors, and rheostats, using affordable hand-tools. Once electronic circuit integration began, hobbyist electronics was over.

RSH should have liquidated operations around 1990 and the RSH stores converted into pawn shops, nail salons, martial arts parlors and the like. It's not too late to do that."
To which our first correspondent replies,
"The economics of integrated circuits really changed the game in the 70s as the Japanese got up the curve and scale became so important. By the late 80s, Radio Shack had to buy stuff made by other people because their volume wasn’t enough to make their costs competitive. Seems like they’ve been in search of a competitive advantage since then. Phones were a pretty good business when they were still in the growth phase and somewhat novel for a lot of people. Now that they are commodities, it is a different story. It’s not obvious what their competitive advantage is or could be at this point."

1 comment:

Alesia said...

One of the correspondents got it right, they should get into the leading edge type of stuff like 3D printers and the like. The have to survive, RadioShack is where I go wher I am looking for something that I need now that cannot be found anywhere else.

I'm a 56 year old geek, and a woman to boot. RadioShack is the only place where I have always ben treated with respect. I have forgotten more about high tech than any snot nose sells person in Best Buy (and any store like it) has ever and will ever learned; not to mention those. Geek Squad guys , aargh.... My first. Stero system was Realistic, I eanted TR-80 so bad but did not get it, had to stay happy with my Atari and then my dad got a Comodore. Finally got a 8086 right out of school... But RadioShack has to stay on. They need to convert with the Karate Instructor (is confident with speaking to, motivating, and directing a large group of people) and offer part to the DIY, for home security and automation, for example, rent out 3D printers, help desks and demos for new technology and revive their fix it shop.