Facing Bankruptcy, RadioShack Corporation (RSH) Future Depends On Branding

RadioShack Corporation once filled a comfortable niche in a world where consumers bought small electronics items — batteries, cords and transistor radios — in neighborhood stores. Now, the very name of the 94-year-old retail franchise reflects its age and its struggle to keep pace with consumer tastes.

“To have customers shopping at a ‘shack’ that’s called ‘radio’ is symbolic of how out-of-touch they are with 2015,” said Adam Sarhan, founder and chief executive officer of Sarhan Capital. “They lack something that distinguishes them in the marketplace, which they need. Otherwise they’re headed to extinction.”

After a string of quarterly losses, including $160 million in its third fiscal quarter of 2014, the Fort Worth, Texas, company is preparing for bankruptcy court, which could lead to an ambitious court-approved restructuring plan, or the auction of its assets and extinction.

“It’s like Humpty Dumpty,” said Bob Phibbs, CEO of The Retail Doctor. “The company fell and nobody has been able to put it back together. They have too many locations. As far as brand management, no one would do that in this day and age. They’re still stuck in a 1950s selling mode.”

CEO Joe Magnacca, who in February 2013 became the company’s fourth boss in three years, certainly recognizes the challenges.

“We know that coming to a long-term solution will be difficult,” Magnacca said during a third-quarter-earnings conference call last month. He pointed to improvements in the company’s Web store price-matching platform and a recently introduced “Fix It Here” repair service.

But these efforts didn’t stop the company from reporting in December a 16 percent drop in sales compared to the same period a year earlier and a net loss of $161 million on $650 million in sales. Same-store sales, a standard measure of retail performance, fell by a staggering 13 percent in the 12 months ended Nov. 31.

The company’s sales per-square-foot was about $400 in 2013, compared to over $900 for its closest brick-and-mortar competitor, Best Buy. (Apple is by far the retail leader in this measure, at $4,650 in 2013.)

Phibbs says a notable problem for the company is its focus on upselling customers on warranty extensions. Last year, he went to a Radio Shack to buy a new cord for his iPhone and the cashier spent considerable time trying to sell him a $1.29 warranty extension, instead of steering him to other more profitable products. He says RadioShack lost an opportunity after the famous 2009 shuttering of Circuit City, the consumer electronics retailer that symbolizes the demise of big-box electronic retail.

Best Buy, though doing better than it has in the past, is still grappling with the problem that took down Circuit City: that consumer electronics are increasingly being bought online from companies like Amazon.com and TigerDirect. One of Best Buy’s strategies has been to introduce product-specific sections, turning their store into a kind of consumer electronics bazaar organized by brands, with sales representatives who are experts on them, as well as product types. Also, unlike RadioShack, Best Buy sells larger high-margin items, like refrigerators and flat-screen televisions.

“There was a time when RadioShack could have become the little Apple Store,” said Phibbs. “But most of their outlets still look like they’re from the '70s and '80s, with off-brand toy robots in the front. And when you’re in there, you ask yourself, ‘Why am I here’? The answer is to buy batteries.”

Sarhan says RadioShack is long overdue for giving consumers a reason to be in their stores. “RadioShack needs innovation and fresh ideas,” he said. “They have so many small stores that they could become like Uber, with some kind of app that allows customers to order and offer same-day delivery. They have to give the consumer at least one reason to shop there.”