Radioshack’s Business Model is to Sell Mobile Phones

Written by

Jae Jun

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RadioShack is No Longer a Parts Retail Box

RadioShack continues to get cheaper and cheaper, but in the case of RSH, whether there is value is a different story.

Consider this.

RadioShack has seen most of the growth in its business coming from sales of prepaid and postpaid mobile phone and receiving commissions from sales.

By reading the 2010 and 2011 annual report and the latest quarterly report, it becomes clear that RSH strategy is to transition itself into a national licensed seller of mobile phones, wireless devices and accessories.

Proof is in the numbers. The Mobile business accounted for 51.4% of net sales in 2011, up from 44.2% in 2010. Clearly, RadioShack is no longer an electronics and parts retail store.

Mobile Kiosks are Not a Long Term Strategy

Since 2009, RSH started testing and rolling out kiosks selling phones in Sams Club and the company is now opening up kiosks exponentially within Target stores.

In 2009, RadioShack had 104 Target kiosks, 850 in 2010 and 1,497 as of March 31, 2012.

These kiosks are doing well and adding to revenue, but whether this can translate to long term cash flow is a different story.

Keep in mind that these kiosks are tiny. Only 16 sq ft so the capital expenditure required is minimal, however, kiosks are not long-term solutions. They are literally mobile phone tents.

The only competitive advantage that RadioShack cites regarding this strategy is that they are “convenient”. Convenience is not a competitive advantage unless it is done like Walgreen.

How will RSH Handle Mobile Competitors?

More problems are going to arise as competitors with deep pockets march their way into the market in creative ways.

Apple attracts heavy traffic to their stores where they sell a ton of iPhones. Microsoft also has their own stores where they sell Windows Mobile phones and Samsung will also open their first branded store in Burbandy B.C., Canada, offering a wide variety of Android phones. But wait, there are rumors that Google will do the same.

And that’s going to be a problem.

Apple and Samsung are number 1 and 2 in the smartphone industry, with strong brand recognition. Google has the highest market share of the smartphone OS and I’m sure their stores will be a lot of fun too.

How will RSH handle its competitors?

Gross Margins an Indications of Things to Come?

Gross margins will continue to drop as smartphones carry a lower gross margin. TTM gross margins has already declined another 1.3% and is now at 40%. The lowest it has ever been in over 10 years. I fully expect further gross margin erosion. 40% still is too high for their new business strategy.

It’s difficult to see whether RadioShack will succeed as a business, and I’ll get to a full valuation next week.

Next week, I’ll go through the numbers to see whether RadioShack is a value trap or unbelievable value. After all, RadioShack is now a Graham net net.

I’ll leave you thinking about RadioShack’s business model over the weekend along with this companion stock valuation spreadsheet in PDF with all the numbers.

>Download the RadioShack (RSH) Stock Valuation Report<

RadioShack (RSH) Key Statistics

(calculated with the stock valuation spreadsheets)



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8 responses to “Radioshack’s Business Model is to Sell Mobile Phones”

  1. Dan Synek says:

    As the mobile phone market matures I would expect a rising percentage of sales to be peripherals – a high margin product. Do you know the percentage of sale it is now, its rate of increase and what the margins are. The last 3 years I have bought innumerable pairs of earphones, a plastic screen cover, a capacitive pen, many replacement batteries, an extra adapter etc etc. And there are new products, such as RFID stickers and be sure that this is an area capitalism and creativity will do its magic to come up with new “must-haves”… And these products are often so cheap it isn’t worth the effort to order them online…. Also, I expect people will come there for service and repairs. Now, maybe you are right, but you are a numbers guy, so show me the data if you think they will die a low margin death…. To me it looks like the typical example of when we (you 😉 ) fall for the Halo effect and just concentrate on one side of the story….

  2. Jae Jun says:

    Good point about the accessories. You are right about that. I know a couple of people who ran their own phone store and accessories is where they make money. It’s a lot like a gas station. People come for gas, but the station actually makes money off the drinks and other things from the store.

    But that brings me full circle to the question
    “is this sustainable and will be work?” and more importantly, would you buy a stock in a company that makes money off accessories?

    I actually started reading up on RSH because I thought there would be value and didn’t really know much about their business direction.

    The entire mobile segment is offsetting the declines in drops in home accessories and consumer electronics but they don’t break down the margins for accessories. One way would be to look at an accessory only company like IGOI whose gross margin was 30% but has since dropped to 20%.

  3. Dan Synek says:

    I don’t live in the states so I cannot do it, but checking how Radio Shack is doing on accessories (thanks for the correct word) would be a worthwhile scuttlebutt…and Jae I have absolutely nothing against owning part of a company that makes money on accessories or prepackaged vacuum as long as it sells….

  4. Greg S says:

    “IT’S A TRAP!”

    Seriously, though, I think regardless of stock price, Radio Shack’s intrinsic value is declining. Revenues down, margins down, EBITDA down, profit down. Only plus I see is reducing share count. With intrinsic value declining, there’s no reason stock price can’t keep dropping. Certainly there is little to send it in the other direction.

    I think Radio Shack needs to be thought of as a turnaround. Unfortunately, Radio Shack has been trying to turn it around for years without success, and now they have increased competition that will make it even harder. Best Buy seems intent on trying to survive by moving into Radio Shack’s space. I don’t think that ends well for either firm.

  5. Jae Jun says:

    I was walking past Radioshack the other day and also happened to visit a nearby Target. Didn’t get to see a Target Mobile store in there, but it got me thinking. If the mobile tents are only 16 sq ft in area, that wouldn’t leave much room to sell any accessories. So it seems like high margin accessories are sold only in Radioshack stores.

  6. Dan Synek says:

    Last time I went to a similar shop the people ahead of me in the line bought batteries, ear phones, screen covers, mobile phone purses and turned in phones for repairs. None of them bought a phone. The accessories are very small and kept in cupboards on site.

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