RadioShack reports bigger loss, departure of CFO

Posted Tuesday, Jul. 23, 2013  comments  Print Reprints

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RadioShack announced a wider second-quarter loss on Tuesday and said it has hired a turnaround consultant to help a new team of executives develop a strategy to rejuvenate the consumer electronics retailer.

The Fort Worth-based company also said that Chief Financial Officer Dorvin Lively had resigned to join Planet Fitness. Lively served as interim chief executive officer after Jim Gooch was fired last year, but was passed over when the board hired former Walgreen executive Joseph Magnacca as CEO in February. Holly F. Etlin, a managing director at the turnaround firm, AlixPartners, was named as interim CFO.

The loss of 53 cents a share was worse than analysts’ estimate of 24 cents, according to a research note by Janney Capital Markets.

Net sales were $845 million, down slightly from $849 million last year due to some store closings, but comparable store sales grew by 1.3 percent.

“While the second quarter presented a number of challenges, it is noteworthy that we generated comparable store sales growth for the first time since 2010, and increased sales for the sixth consecutive quarter in our high-margin signature platform of products,” Magnacca said.

But Wall Street wasn’t impressed. RadioShack shares (ticker: RSH) declined more than 5 percent, losing 15 cents a share to close at $2.78 on the New York Stock Exchange.

Although sales at stores open at least a year have improved and management has taken a number of right steps, “we believe RadioShack will continue to have a difficult road ahead given the threat of the Internet and product cycle headwinds,” analyst Bradley B. Thomas of KeyBanc Capital Markets, said in a research note. Thomas maintained his “hold” recommendation to shareholders.

“All these are big changes at RadioShack and while near-term results could be volatile, they are steps in the right direction,” said analyst David Strasser of Janney Capital Markets. “We believe Mr. Magnacca has a window of 18 to 24 months to show progress in the turnaround.”

Despite repositioning its branding and opening a new concept store, Magnacca said, “Our profitability was not where we would have liked. Our strategy this quarter was designed to move through unproductive inventory and test a variety of promotional vehicles, which we knew would have an impact on gross margin rate, but would help us identify opportunities to better align our promotional marketing going forward.”

He went on to say, “To support and accelerate the turnaround, we have decided to bring in AlixPartners, a global business advisory firm with expertise in corporate turnarounds, and Peter J. Solomon Company, an investment banking firm.” Etlin said Solomon would take a hard look at RadioShack’s capital structure.

In a research note, analyst David Strasser of Janney called the quarter a “modest success,” noting that it succeeded in converting $100 million of inventory to cash.

Magnacca told analysts during a conference call that markdowns and a coupon scheme that gave further savings to buyers within 30 days helped empty the shelves but were a “margin killer.”

The CEO, who took over in February, said that RadioShack planned to scale down store inventories from 4,000 items to under 3,000 by removing redundant and unproductive goods. But he said stores would be stocked differently depending on local market conditions with inventory shifted between locations, and that products no longer found in company-owned outlets would still be sold online and at franchised stores.

Magnacca also said that sales commissions had overly focused on low-margin, post-paid cell phones but this has been changed to a far broader “four-wall” approach, which employees already are seeing reflected in their paychecks. Training for sales staff has been ramped up and clerks must earn the right to work at new concept stores, he said.

RadioShack met with major vendors in May, which Magnacca said was the first such meeting in a long time. The message to them was that the chain was going from a “me too” approach in selecting products to identifying items that embraced “unique innovation,” such as new Bluetooth speakers, the CEO said.

He disclosed that extensive store remodeling would be very limited — about a dozen of the chain’s 4,400 company-owned stores — with much of this year’s capital outlays going into IT and the e-commerce business.

Magnacca asserted that the company’s other stores would benefit from a “halo” effect that would be created by the new concept outlets — mainly in the New York area — and by thinning out inventory, constantly changing selection and renewing a focus on higher margin, non-mobility products like accessories and power adaptors.

The reduction of individual items will create space for whole new categories, he said. And a particularly successful item could evolve into a whole new category.

“We want categories that drive growth,”: Magnacca said.

“We have a clear plan of action and our team is completely focused on driving the business forward. I remain confident that we can build on our strengths, improve our financial performance, and return this company to a position of prominence in the lexicon of American retailers,” he added.

Janney’s Strasser offered cautious praise.

“All these are big changes at RadioShack and while near-term results could be volatile, they are steps in the right direction,” he said, adding that the new CEO has enough cash available to carry out changes. “In our opinion, liquidity near term is sufficient and we believe Mr. Magnacca has a window of 18 to 24 months to show progress in the turnaround.”

Barry Shlachter, 817-390-7718 Twitter: @bshlachter

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