Is RadioShack the Next Kmart?

Ask the average person on the street to compare RadioShack (RSH) to Kmart and you will likely hear a lot of similarities posed from people who have no investment background at all. Both retailers were a lot more popular with shoppers many years ago, but were run poorly and new chains have stolen their customers. It’s not hip to go to either place to buy something. Kmart shoppers now visit Wal-Mart (WMT). RadioShack’s customers likely prefer Best Buy (BBY). So, in that sense RadioShack is Kmart.

But let’s look at this from an investment perspective. Followers of Kmart’s emergence from bankruptcy and subsequent merger with Sears (SHLD) know that good management led to a stock surge from $15 to $175 in a few years’ time. RadioShack isn’t quite in as bad a shape as Kmart was (the company is not close to going under, but profits have tumbled and the stock price has followed suit) but the outlook is bleak and shoppers likely have a long list of stores they’d prefer to go to before RadioShack for most electronic products.

The similarities don’t end there. RadioShack has embarked on a turnaround plan that is being led by CEO Julian Day, who has been running the retailer since July. Kmart/Sears fans may recognize this name. Day ran Kmart upon its exit from bankruptcy, leading the company’s comeback, which ultimately allowed Kmart to buy Sears outright. Now at RadioShack, Day is trying to revive the company (and its stock price) using the same methods that brought Kmart back from the dead.

The similarities, in fact, are striking. RadioShack is closing down unprofitable stores, focusing on profits and not sales (and as a result, comp store sales are declining, much like Sears Holdings), and has even discontinued quarterly conference calls, a favorite move of Eddie Lampert. Though Day has only been at RSH for about six months, early indications are that the plan could very well work. On January 8th, RSH preannounced a positive fourth quarter and the stock jumped more than 10 percent.

Now I’m not saying RadioShack shareholders are in for some sort of parabolic ride, on the order of the 1,000 percent gain in shares of Sears Holdings. Far from it, in fact. However, investors have seen this concept play out before. RadioShack appears to be just another retailer that got in trouble by chasing unprofitable sales, hoping that revenue would solve its problems. However, on Wall Street earnings are what matter and earnings growth has never been boosted by selling product for less than one paid for it.

It will be interesting to see how well newly crowned CEO Julian Day can turn around this seemingly dead company. Many investors don’t seem to be very enthused, as short interest in RadioShack is about 15% of the company’s float. However, with 6,000 stores worldwide and a proven plan in place, there seems to be a lot of potential.

Full Disclosure: Long RSH and SHLD

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3 Thoughts on “Is RadioShack the Next Kmart?

  1. simon abercrombie on February 6, 2007 at 8:53 AM said:

    Chad, what do you think about SHLD?
    Do you consider SHLD to be another ‘Berkshire Hathaway’? Do you think Ed Lampert uses SHLD similar to Brk – a company which keeps on buying other companies?
    Thanks

  2. Chad Brand on February 6, 2007 at 9:26 AM said:

    Simon,

    SHLD has been a large holding of mine for several years, and I remain bullish on the stock.

    The Berkshire comparison is interesting, but I would classify SHLD as BRK to some extent (because the company will have many different cash flow generators, not just the core Sears/Kmart retail businesses), but it will be BRK on a much smaller scale.

    I don’t think SHLD will have dozens and dozens of subsidiaries, and I don’t think they will be as diverse as BRK. I don’t think Lampert 10 years from now will own companies in retail, insurance, banking, beverages, materials, etc. He will have multiple income streams, just with a much smaller reach in my opinion.

    Of course, nobody knows for sure what he is thinking, so it will be fun to see how it plays out. SHLD is a holding company though, no doubt about that, not just a retail operation. So in that respect the BRK comparison makes sense.

  3. simon on June 22, 2007 at 7:24 AM said:

    Hi Chad,
    just a short update. I just stumbled upon an interview with Cramer, who sees SHLD as a domestic Berkshire:

    http://www.thestreet.com/_tscwrap/funds/realmoneyradiowrap/10364087.html

    Extract: …Sears (SHLD – Cramer’s Take – Stockpickr) is a domestic Berkshire Hathaway, he said…

    Simon

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