Industry Insight: Rewiring RadioShack - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?)
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Industry Insight: Rewiring RadioShack

by Richard Collings  |  Published July 17, 2013 at 10:15 AM

A news release touting a new store opening usually ends up in my e-mail's trash bin before I finish reading the subject box.

But in this case, the announcement came from RadioShack Corp., and it heralded the electronics retailer's new concept store -- designed to offer a friendlier customer experience -- a key component in chief executive Joe Magnacca's attempt to turn around the ailing electronics retailer.

Magnacca is not from the electronics world. His experience is in pharmacy -- he was previously an executive at Walgreen Co., in charge of all the drugstore chain's marketing and merchandising operations.

More important to this story is Magnacca's stint as the president of Duane Reade, the New York-based chain that occupies just about every other street corner in the city. He was initially brought on board by that company as chief merchandising officer. What RadioShack's board and shareholders were looking for when they installed Magnacca on Feb. 11 is the same magic he worked at Duane Reade as well as at Shoppers Drug Mart in Canada, another turnaround stint for Magnacca.

Here's what Magnacca faces at the purveyor of batteries, cables and cords: $435 million in cash and $712 million in total debt, according to numbers provided by Bloomberg. Ebitda has plummeted to $41 million for the 2012 fiscal year ended Dec. 31, from about $438 million in 2010. Estimated Ebitda for 2013 is expected to be $27 million. On Sept. 26, 2012, CEO James Gooch stepped down after only a year-and-a-half on the job, paving the way for Magnacca's arrival. At that point the company was reporting quarterly losses and saw its stock sink from its 52-week-high by nearly 82% to $2.56 per share. As of July 10, the shares have rebounded slightly, to just north of $3.

So Magnacca has some work to do at a retailer whose very name connotes dilapidation. That's especially true if, as some observers believe, the company is sprucing itself up for a potential buyout.

For now, though, what can shoppers expect? Magnacca's prescription for Duane Reade included a complete store renovation. As the spaces became brighter, sleeker and more spacious he was able to attract more premium product lines, such as in the beauty category with its new "Look Boutiques."

He leaned on relationships cultivated during his seven-year tenure at Shoppers Drug with a number of suppliers of beauty and personal care products, convincing them to sell their high-end department store wares in Duane Reade.

The remodeled stores were such a success, sources said, that sales per square foot increased substantially and the remodeled stores saw their sales increase in the high teens.

The chain, then owned by private equity firm Oak Hill Capital Partners had once attempted to sell itself, according to a person familiar with the matter, but it was an unattractive target. Then in 2008, Magnacca took over and began renovating the chain and altering Duane Reade's footprint. The results proved irresistible to pharmacy giant Walgreen, which acquired the business in 2010 for $1.1 billion including debt. Oak Hill paid $653 million for the company in 2003.

At the time the deal was announced, Tyler Wolfram, a partner at Oak Hill who oversaw the investment, credited the remodeling of the stores and changes in the mix of merchandising with helping Duane Reade overcome a city economy mired in recession.

The question now, is whether the new concepts RadioShack is rolling out will succeed -- could they be successful enough to entice a private equity buyer? In other words, could RadioShack be dusting itself off for a sale? Or is it just trying to stave off a bankruptcy filing?

A source familiar with the situation said a private equity buyout is certainly one possibility for RadioShack. This person noted that Oak Hill was thrilled with the return on its investment in Duane Reade, which was largely attributable to Magnacca ministrations.

Oak Hill ended up gaining 50% on its investment, breaking down into an annual gain of 12% for the firm, The Deal previously reported back in 2010.

Magnacca's experience working with private equity would certainly present a tantalizing target if his bet on the new RadioShack concepts gains any traction, the source said.

RadioShack, this person argued, has many of the same attributes as Duane Reade, selling low margin, highly commoditzed products offered by a number of competing retailers, in stores with limited square footage.

Touring the new store at 2268 Broadway in Manhattan, however, didn't immediately scream success, as sales associates vastly outnumbered customers despite a recent grand opening in late June. The outlet, though, was cleaner, more modern, and certainly sleeker.

The shelves carried all the expected products -- an array of difficult-to-find batteries and cords, along with a full-line of smart phones and electronic readers, including the Apple iPad and iPhone and the Amazon Kindle, not to mention a plethora of Samsung devices.

What's new, apparently, is that shoppers can try anything out that the store sells before buying it to ensure it is what the customer is looking for. RadioShack is also now hawking speakers, a new category for the once-pedestrian retailer.

Even so, some industry watchers note that the relatively small size of RadioShack's stores will limit its selection in higher margin categories such as speakers, laptops and digital cameras. Shoppers could end up at competitors offering more choices.

I didn't see, for example, any speaker products from the likes of Bose, a well-known high-end brand name in the category. Maybe the renovations will make it possible for RadioShack to carry some of those products.

It would be interesting to hear more about the new store concept and on brands the company is selling there, as well as on potential private equity interest, but RadioShack did not respond to requests for comment. The company did release a statement last week responding to reports that it was looking to hire an investment bank for advice on issues such as cash burn and looming debt maturities. "We continue to have a strong balance sheet with total liquidity of $820 million at the end of the first quarter," the company said in the statement. "Like many companies, we have discussions with investment banks from time to time to help us evaluate ways to further strengthen our balance sheet and manage it efficiently. That has been the sole focus of these discussions."

Obviously, it's too early to say if the new store concepts will spark a recovery at the dowdy electronics chain, as only two of them have been launched. The company plans more and there is a consensus among industry watchers that these new spaces are RadioShack's last chance to reverse its decline and ultimately avoid bankruptcy.

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Tags: Duane Reade | Ebitda | James Gooch | Joe Magnacca | Oak Hill Capital Partners | RadioShack Corp. | Shoppers Drug Mart | Tyler Wolfram | Walgreen Co.

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Richard Collings

Senior Writer: Consumer Products & Retail



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