Radio Shack fixes compensation and staff reductions but reductions in labor hours will not make up for comparatively non compelling merchandise assortment.

Implications: Despite the lower sales of 9.4% (8.6% comp.). Radio Shack Corp. (RSH) posted an operating margin of 7.55% compared to 0.3%, last year. The improvement was the result of controlling the SG&A. Julian Day and his management team are good operators but time will tell if they under stand the merchandising side of this highly competititive sector.

Analysis:  

Getting the SG&A in line is pretty much simple math or plugging the dynamic into staffing software to fill out what used to be manual time sheets. This is not “low hanging fruit” but instead, fruit that has been rotting on the ground. The challenge will be if management has a grip on the business they are in and can re create the niche that Radio Shack once served. Improving the flow of merchandise is another dynamic that is purely operational and still fails to address the brand identity and who the company wants to serve going forward. There has been indeed been a noticeable shift into higher margin products but these items are readily available at Best Buy, Circuit City and to a certain extent Office Depot and Staples.

Management realizes that in order to make RSH an attractive investment it is going to have to improve top line sales and margin A.S.A.P. Their current plan of expanding into the assortment of consumer electronics is not going to get them to the Promised Land. Right now their only discernable edge is that they are conveniently located and a customer can avoid the big box C.E. retailers if they prefer.

With it’s plans to increase the penetration of C.E. into the assortment and the companies continued reliance on the wireless business prospects do not look promising. The competition is too fierce in all these classifications to ensure top line growth and margin growth simultaneously.
 

RSH needs to compliment its unique mix of hard to find adapters and gadgets in order to make them somewhat of a destination store where they can then sell the ubiquitously available wireless and C.E. segments of their assortment. They need to turn their core competency of specialty items into an aspirational assortment and market the fore mentioned  as “must have” items in order to drive consumers into their stores.

The good news is that current management has indeed turned around the business operationally and even the smallest improvements in profitability and continued improvements in SG&A will bear greatly in ROIC given RSH’s large revenue numbers.