In February 2015, RadioShack (RSHCQ), a renowned electronics store, filed for Chapter 11 bankruptcy protection following many financial and operational missteps. The company had too many stores that cannibalized revenues from each other and generated losses. RadioShack failed to adapt and stay relevant when most electronics sales shifted online, and the retailer was stuck in brick-and-mortar locations only.
By 2013 to 2014, RadioShack had a high sales concentration coming from cellphones, which accounted for over 50% of the total sales and generated poor profit margins. The company frequently changed its management and direction for the turnaround. In addition, RadioShack made a financial mistake by taking a loan from Salus Capital in 2013 that required the lender to close no more than 200 stores a year.
1. High Store Concentration
In 2014, RadioShack operated about 4,300 stores in North America. However, there were many stores that were located too close to each other. For example, there were 25 stores near Sacramento, California, located within a 25-mile radius, and seven stores within five miles around Brooklawn, New Jersey. With so many stores within close proximity to each other, RadioShack experienced a significant drop in profitability and inventory problems as the store traffic dried up. It became very costly to maintain so many stores with sometimes insufficient inventory in one area.
2. Online Competition
Relying solely on its brick-and-mortar sales network, RadioShack began experiencing significant profitability and sales pressure, as consumers were buying electronics parts and other gadgets from online retailers such as Amazon and eBay. For many consumers, RadioShack became irrelevant; any electronics part could be purchased cheaper with a click of a button and delivered anywhere within the United States. Moreover, consumers made numerous complaints that RadioShack lacked certain inventory, making it even less likely that shoppers would come back.
3. Product Concentration
In the early 2000s, the company made a strategic shift towards selling cell phones and accessories that proved to be lucrative for some time. By 2014, cellphones alone accounted for about 50% of the company’s total sales, making it a very risky proposition of a high product concentration. Things began changing rapidly after the introduction of the iPhone in 2007. As the sales channels for cellphones began shifting towards buying phones through wireless operators, many carriers substantially reduced payments to RadioShack and similar resellers to mitigate the rising cost of subsidizing iPhones. As a result, RadioShack’s profit margins and sales deteriorated significantly, precipitating the company’s bankruptcy.
4. Management Problems
The constantly changing management did not help the company’s efforts to turn itself around. From 2005 to 2014, the company changed its chief executive officers seven times. Joseph Magnacca joined RadioShack in 2013 as its CEO to speed up the turnaround. The company set a goal of restoring profitability by 2015 with a significant store, and product revamps changes in compensation structure, and aggressive marketing campaigns. However, as Magnacca’s effort started rolling out, the results got worse due to rising costs, constantly shifting management orders on short notice, and confusing commission structures. The workers’ morale and the company’s profits slipped even further.
5. Financial Missteps
Because RadioShack had experienced negative earnings since 2012, the company needed significant capital infusions to stay solvent. In December 2013, RadioShack was able to obtain a $585 million line of credit from GE Capital and the $250 million term loan from Salus. The $250 million term loan came with the condition that RadioShack could not close more than 200 stores per year without Salus’ consent.
As the RadioShack’s cash burn accelerated in 2014, the company attempted to close over a quarter of its stores to stop the cash outflows; however, Salus thwarted the closure efforts due to a lack of confidence that the company’s business plan would succeed. This accelerated the bankruptcy filing due to lackluster 2014-2015 holiday season sales and continuing cash burn.
Read the original article on Investopedia.