RadioShack's Back-to-Basics Strategy

Big-ticket items haven't been producing, so the retailer's new approach emphasizes parts and accessories. The Street has yet to be convinced

By Amy Tsao

When I think of RadioShack (RSH ), I remember the plush puppy my parents bought me there when I was a kid. They also bought the batteries needed to make its tail wag and head bob. Throw in a blank cassette tape and a phone cord, and you have what used to be a typical RadioShack purchase.

In recent years, the Fort Worth (Tex.)-based company has moved a long way from that image. While keeping its traditional stock of gadgets, parts, and electronics gear, it moved into cutthroat competition with electronics retailers such as Best Buy (BBY ) and Circuit City (CC ).

The strategy of adding new merchandise, through partnerships with companies like RCA for TVs and video products and Compaq for PCs, turned out to be a huge hit. Between 1997 and 2000, earnings per share jumped from $0.94 to $1.84, at a compounded annual growth rate of 25%. The stock soared to $80 per share at the beginning of 2000.


  RadioShack seemed to have discovered a way of growing without having to open a lot of new stores -- it already has 7,100 outlets. Lately, however, its share price has plunged to just $27, reflecting hard times in electronics retailing.

Now, RadioShack is rejiggering its strategy. In response to the broader malaise within the sector and its own struggle to find growth, RadioShack recently said it will take a step away from consumer electronics and devote more attention to expanding its parts, batteries, and accessories business. The company says it can increase this business -- which has higher margins than consumer offerings -- 25% per year for the next four or five years, thereby boosting sales to $3.75 billion from $1.25 billion.

In 2000, the chain earned $593.6 million on revenues of $4.79 billion, with parts accounting for 24.8% of revenues. Now, the idea is simply to sell more to RadioShack's legions of shoppers. Chief Executive Leonard Roberts says 80% of the chain's customers come in to buy parts, but 30% leave without finding what they are looking for. "We typically only handled accessories for products we sold. Now we'll have them all," he says.


  RadioShack figures if it can just convert a little piece of that unmet demand into additional sales, revenues will get a nice boost. The parts market is expanding by a solid 10% or so annually, while sales of major electronics products have declined sharply as the slowing economy weighs on consumers.

To make room for more parts and gadgets, "anything that's big" is out the door, Roberts says. Among other products, the chain will drop big-screen TVs and CBs -- although Roberts won't say exactly what merchandise will be axed. With the big products gone, Roberts says the company will have space to boost its parts, batteries, and accessories offerings by 20%.

Wall Street is skeptical that this refocusing on mundane, back-of-the-store products will lead to big returns. The strategy might help, analysts figure, but can it really offset the weakness in sales of the products that fueled the chain's meteoric rise?


  For instance, although revenues from sales of Sprint PCS and Verizon Wireless subscriptions are its fastest-growing segment, they are starting to peak. And growth in Direct TV and broadband services is decreasing rapidly. RadioShack's vaunted partnership with Microsoft to sell broadband Internet products and access seems to have fizzled, analysts say. says Gary Balter, an analyst with Credit Suisse First Boston: "With [the strength of such businesses] now in question, returning to a growth story may take longer than investors seem to believe."

There are plenty of risks inherent in the new strategy. The chain will have to sell an awful lot of parts to make up for lost sales of big-ticket items. Plus, it won't be easy to corral the fragmented market. Right now, RadioShack says it has just 5% of the $25 billion parts market. It aims to have 20% by 2006, but competition is very stiff.

RadioShack may be conveniently located, but consumers can buy such things from a myriad of stores -- including Wal-Mart (WMT ) and Home Depot (HD ) outlets, as well as from specialized electronics retailers. "They've done a great job increasing productivity, but I think they need some exciting new products to grow," says Bill Baldwin, an analyst with Baldwin Anthony McIntyre.


  He fears RadioShack will fare worse than the rest of the consumer electronics industry because its limited product selection is being pared back even more. Plus, now that most of the high-priced gadgets are already in the hands of consumers, companies selling the components that go with them -- DVD discs, CDs, video games, software -- appear to be holding up better than those like RadioShack, which don't.

Some analysts fear the chain's earnings already are shakier than they appear. For the quarter ended June 30, RadioShack posted earnings per share of $0.25, or $48.9 million, in line with estimates. The company did not disclose how much of its $1.04 billion in quarterly sales came from cell-phone subscriptions, but analysts expect it's hefty -- around 20%.

Although that has helped prop up RadioShack's results, such revenue is tenuous, relying heavily on what wireless providers are willing to spend on advertising its services. "When you don't have aggressive promotion going on, that business slows done considerably," Baldwin says. RadioShack has signaled analysts to expect wireless sales to expand by only 15% in 2001, rather than the 20% previously expected.


  A bigger slowdown may be in the offing as the wireless phone market starts to mature. Roberts is hoping to offset declining growth by nabbing market share from competitors, partly because he considers Sprint PCS and Verizon to be the premier wireless providers. "The business is either not slowing as much as people say or we're just capable of grabbing market share because we have the distribution," Roberts says.

Meanwhile, he is considering expanding the chain's store base by installing RadioShack outlets within Blockbuster video stores. The company is testing the concept in four cities -- Las Vegas, Tulsa, Norfolk, Va., and Austin, Tex. If it works, the move into Blockbuster will give RadioShack exposure to a younger and predominantly female audience.

Will this be enough to return RadioShack to strong growth? Seems doubtful. For now, RadioShack may be a good short-term defensive play in troubled times. "We believe the company is well-positioned to weather a potentially difficult second half, particularly because of this focus on their core hallmark and high-margin category," says Lauren Cooks Levitan, a retail analyst with Robertson Stephens. But it may take hot new electronics products to add some real juice to sales.

Tsao covers financial markets for BusinessWeek Online in New York

Edited by Thane Peterson

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