The sale of this season is being offered by an emotionally unstable “Mr.
Market,” who, at the moment, happens to be very depressed on the retail sector
in general, and Radio
Retail Distributor Turnaround Plan 101
Before agreeing to join any company, a good manager will take a strong, hard
look at the financials.
This is what Mr. Day saw when he looked at Radio Shacks’:
The first thing that you’ll notice is that from 1998 to 2005 sales increased
from $3.5 billion to $5 billion. Not too shabby at first glance.
Then, over the same period of time, the gross margins declined from 52.1% to
46.7%, which meant that the company was paying manufacturers more money for the
products that they were retailing.
This is a very hard thing to do in an environment where China makes all sorts of
electronics at very low cost.
Operating margins also trended downward the entire time, going from a high of
14.4% to 9.3% in 2005. That meant the company had higher selling, general, and
administrative costs than they should have.
In a period where the company has paid down 10% of their debt – and lowered
their interest expense – operating margins should be going higher instead of
lower.
Furthermore, net profit margins sank from 6.8% to a dismal 4.2%. For a company
that does $5 billion in annual sales, that means a decrease in net income of
over $120 million.
And finally, let’s get back to return-on-invested capital (net income/invested
capital). Of course, you could do the math yourself: All things being equal,
when net income declines, this will decline as well. Radio Shack’s Medicine
As Mr. Day studies all this information, it occurs to him that from 2000 to
2006, one person’s been running the company – David Edmondson. Prior to him, the
numbers looked great. It was only after he came on board that Radio Shack’s
numbers, and its stock, fell apart.
Radio Shack
Why There’s a High Likelihood of Success
Mr. Day knows, as do all good managers, that his first priority is to correct
the income statement.
But the easiest and fastest thing Mr. Day will do is to focus on increasing the
company’s operating margins. Unfortunately for some, that means that Mr. Day
will have to lay off hundreds – if not thousands – of workers through store
closings and general releases.
Based on Mr. Days past experiences, neither feat seems too difficult to achieve.
In fact, I would bet a lot of money that both will be accomplished inside of the
next 18 – 24 months.
The result?
For every percentage point that a $5 billion company increases its profit
margins,
it can realize an additional $50 million in profits … an extra 37 cents per
share.
When Mr. Day is done doing his job, the chances are high that Radio Shack’s
margins will look similar to how they looked in 2000, the first year Mr. Edmonds
took over.
That means net profit margins would soar from 4.2% back to 7.7%.
At those margins, to give you an idea of the impact, Radio Shack’s 2005 profits
would have soared 56% to $333 million. Per share earnings would have soared from
$1.43 to $2.23.
At 15 times earnings, the stock would be selling in the $33.45 range; at a 20
P/E, the stock would be selling for roughly $44.61.
With numbers like these, it’s easy to see why Mr. Day took most of his
compensation in stock options.
Radio Shack “At A Glance”
Radio Shack Corporation
Mail Stop CF3-203
300 Radioshack Circle
Fort Worth, TX 76102-1964
Phone # 817-415-3011
http://www.radioshackcorporation.com
Description:
Fort Worth, Texas-based RadioShack Corporation (NYSE: RSH) is one of the
nation’s most trusted consumer electronics specialty retailers and a growing
provider of retail support services. The company operates a vast network of
sales channels, including: more than 6,000 company and dealer stores; more than
100 RadioShack locations in Mexico; and nearly 800 wireless kiosks.
Highlights:
Strong brand name in local retail niche;
Locations give protection against “big-box” retailers such as Best Buy;
Turnaround expert Julian Day joined company 2006; expected to increase margins
by reducing costs which should bring $100 million in profits directly to the
bottom line.
Simple cost cutting measures should add .74 cents to bottom line in 2007.
Key Stock Statistics:
52 Week Range: $13.37 - $23.50
Avg. Volume: 2.1 million/day
Market Cap: $2.28 Billion
Estimated/Normalized P/E: 10
Valuation:
Current/Recommended Price: $16.87
Estimated Value: $40
Expected Return: 120%
Recommendation: Buy
