Circuit City 2.0: RadioShack

Poor management, changing retail dynamics and Best Buy (NYSE:BBY) put Circuit City Stores (PINK:CCTYQ) out of business. The final nail in Circuit City's coffin was a sharp downturn in consumer spending at the outset of the financial crisis of 2008. This story sounds eerily familiar for electronics retailer RadioShack Corporation (NYSE:RSH). (To learn more about failing companies, check out What You Need To Know About Bankruptcy.)

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Is RadioShack the Next Circuit City?
Less than 3 years ago, Circuit City filed for bankruptcy. At the time, Circuit City was the second largest consumer electronics retailer in the United States. The very company that put so many small electronics stores out of business just couldn't compete with Best Buy's selection, Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation's (NYSE:TGT) discount pricing, and the convenience of online retailers like Amazon.com (Nasdaq:AMZN). RadioShack is experiencing, to a lesser degree, all of these difficulties.

Founded in 1921, RadioShack operates smaller stores compared to big box retailers like Best Buy and Wal-Mart. While the Fort Worth, Texas-based electronics retailer was able to capture some of the market share that Circuit City left behind, growth has not only stalled - it's contracting. Consecutive quarters of falling net income reflects RadioShack's inability to grow earnings that are needed to justify owning this stock in the short-run. RadioShack is planning to turn things around by focusing on the lone segment that is producing positive results; the ultra-competitive mobility segment.

The problem is that Wal-Mart, Target and Staples, Inc. (Nasdaq:SPLS) are ratcheting up wireless exposure. That's not the only source of increased competition on the way. Like Circuit City, RadioShack's brick and mortar centric business model is about to face even more competition from Best Buy, which recently decided to transition towards smaller outlets in place of traditional big box stores. Competitive pressures, in addition to the ongoing paradigm shift toward online purchasing (where RadioShack, to be blunt, is getting poor reception from internet shoppers), are strong headwinds.

Expensive Buyback
The price trend mirrors Circuit City as well. RadioShack's shares peaked in late 1999 and have steadily lost value over the course of more than a decade. Believing the company to be undervalued, management has been busy buying back shares over the past year. As it turns out, those shares were being repurchased at significantly higher values to current market price. Down 37% year-to-date, the stock is trading at the 52-week low and at levels not seen since April 2009.

To fund part of the buyback, RadioShack issued $325 million in debt back in May. The combination of debt issuance and shrinking profits has increased financial leverage. The byproduct of attempting to artificially boost earnings per share through the repurchase has been more risk and the diminishment of a strong cash position.

The Bottom Line
Despite the Circuit City parallel, there are a couple of reasons to like RadioShack. Cheaper oil should help alleviate margin pressures, and the 2% yield isn't bad. More importantly, consumers still want their gadgets; electronics and appliance retailers posted a strong 1.4% sequential increase in sales during July. RadioShack's recent agreement to sell Verizon's wireless products is a positive catalyst.

However, consumer sentiment is turning increasingly negative as the jobs picture remains bleak. RadioShack growth prospects are narrowing into an already saturated mobility market. The lackluster online presence, compared with competitors, and out-of-date physical locations suffer from undesirable nostalgia. RadioShack might not be following Circuit City out the bankruptcy door just yet, but investors would be better served shopping for an electronics retailer elsewhere. (For more, check out Taking Advantage Of Corporate Decline.)

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