Posted on Sun, May. 11, 2008

Mitchell Schnurman: Questions outnumber answers at RadioShack

Is Julian Day stripping down RadioShack for a sale?

Since Day arrived almost two years ago as a heralded turnaround artist, he's ruthlessly cut people, stores and employee morale. That produced rising profits and cash flow, and a serious side effect: steadily declining same-store sales.

In the latest quarter, gains from the skin-tight cost controls appear to have hit a wall. Not even cost-cutting could stave off a decline in the bottom line.

That makes it fair to wonder about the endgame for RadioShack. Retailers can't simply cut their way to prosperity, even if they're as aggressive as Day, so what's next if RadioShack can't figure out a way to grow again?

Rumors have circulated that Dell might buy the chain to get a national footprint to hawk its computers. And when Blockbuster bid for Circuit City in April, there was more speculation about RadioShack's future as an independent company.

These notions gain some currency, because Day has eliminated so much of RadioShack's corporate structure. Payroll and commissions alone were slashed by 20 percent last year, and RadioShack reduced overhead by another $31 million in the first quarter. Again, job cuts at headquarters and the stores accounted for most of the savings.

Now Day is signaling it's time for a change at RadioShack and a new focus on growing revenues. In November, he hired a merchandise manager from Sears, and an analyst expects a marketing chief to be added soon.

Better late than never, but it's hard to understand why a retailer would delay such key hires for so long. Even if cost-cutting is the priority, you can't build a sustainable retail operation without a strong merchant in place.

Meanwhile, the company has lost much of its top talent through layoffs and defections, especially in merchandising and marketing.

And after 22 months on the job, Day still has not articulated a clear marketing strategy for RadioShack -- not to most employees, investors or the press. And people outside his inner circle have no idea how he's trying to differentiate RadioShack from the competition.

Maybe more details will come Thursday, when the company holds its annual meeting in Fort Worth, and Day speaks in public. Shareholders rarely raise a fuss in such settings, but Day's glow has faded in the past 12 months, as the stock price lost more than half its value.

Early in his tenure, Wall Street cheered Day, as RadioShack's stock soared from less than $14 to $35. Investors were betting that the new chairman and CEO would boost RadioShack's cash flow and deploy it for a productive purpose.

As that hope faded, the focus has returned to RadioShack's business itself and the ground it's losing to Best Buy, Wal-Mart and others that sell consumer electronics. The company reported strong sales of GPS devices and storage media, and first-quarter wireless sales actually rose a bit -- up 0.7 percent.

But in every other category, sales fell again, repeating the dominant theme under Day so far. Accessories declined 2.3 percent; personal electronics, which include iPods, fell 1.6 percent; home products, including phones, audio-video and TV satellite systems, were down 16.5 percent; batteries, historically a cash cow, fell 4.8 percent; services like prepaid wireless time and warranties, were down 7.9 percent; kiosk sales dropped 10.5 percent.

RadioShack's stock closed at $14.99 Friday, about a dollar higher than when Day took over in July 2006. Analyst ratings put it among the lowest-ranked companies on the S&P 500, at No. 490.

This month, one analyst upgraded RadioShack to a "buy" -- the only such recommendation among 16 analysts surveyed by Bloomberg. He cited the new hires, including an operations executive added from Blockbuster.

Day doesn't talk to reporters and has just one conference call a year with analysts, so his goals for the company can be tough to decipher. In his letter to shareholders in the recent annual report, he acknowledges the concern about declining sales.

A year ago, he said that "sales increases are good when they are profitable, and bad when they are not." He stands by that, he wrote: "But I would also contend that we have now achieved a robust economic model for your company -- a secure and profitable base on which we now need to build profitable sales."

He cited the recent executive hires and says he's looking for more talent "to reflect our desire to grow profitable sales."

Who's to argue with a goal of profitable sales? But that's a simplistic explanation, even for an annual report, and hardly a business strategy by itself.

Target tells us to expect more and pay less. Wal-Mart is always about low prices. Surely, RadioShack means more than profitable sales.

But maybe that's what happens when the board of directors hires a finance man, not a merchant, to run a national retailer. And then lets him wait a year and a half to pick a merchandise chief.

Contrast that approach with J.C. Penney in 2000. The struggling department-store chain stretched to recruit Allen Questrom, famous for a great eye for retailing and merchandise. Questrom had the stomach to cut workers, stores and other overhead, as most turnarounds demand.

But more importantly, he focused on developing a game plan for Penney to stand apart from its peers. He built it into the fashion leader for the middle class and forged an emotional connection with its customers.

Penney is currently struggling with the slow economy, as are most retailers. But questions about its long-term survival and relevance in the marketplace -- the same questions dogging RadioShack today -- are long gone.

Perhaps Day can break similar ground at RadioShack with the help of his new hires. He's playing catch- up, though, and his heart doesn't really seem to be in it.

If he can't do the job, it will fall to someone else -- either a new top executive or new owners.

GRAPH: RadioShack's ride. STAR-TELEGRAM