Till’s a-Ringing
RadioShack had been an iconic brand for a century. As its name implies, if you were into repairing electronics, tinkering with computer builds in your garage or, in more recent years, wiring up stereo systems or building your own robotics, it was a go-to store. As a guy in his mid-30s, I can remember lots of trips to my local store as my friends and I souped-up old Tandy 2000s – introduced by RadioShack – and tried to fix our Atari’s and original Nintendo systems. I’ll probably never forget the sound of my first dial-up modem, purchased at RadioShack, or my parent’s fury over the next phone bill.
Unfortunately for RadioShack, though, those days are long gone. The nearly century-old chain filed for bankruptcy earlier this week after nearly a decade of trying to stay relevant in changing times and a couple of failed makeovers.
These days, the stores seem to be more about selling cell phones and less about keeping old electronics running. The problem there is that with the rise of company-specific stores, like the ubiquitous AT&T (NYSE: T), Verizon (NYSE: V) or Sprint (NYSE: S) locations, competition has become pretty intense on what have become very low margin products. As a result, RadioShack hadn’t turned a profit since 2011 and finally gave up the ghost, striking a bargain to sell up to 2,400 of its stores to Sprint and a hedge fund which also happens to be its largest shareholder. Then it declared bankruptcy.
But while another iconic American retailer may be biting the dust, thanks to its failure to adapt to changing consumer tastes and needs, the overall state of the retail market isn’t all bad.
Over at Home Depot, 10-year average revenue and earnings growth has stayed consistently positive since 2006. Granted, that’s not exactly an apples-to-apples comparison, but especially during the recession years the home improvement retailer struggled with some of the same issues that ultimately brought down RadioShack: It had expanded too quickly, supply chains became bloated and unwieldy and it entered markets it just didn’t understand.
By the mid-2000s, though, Home Depot (NYSE: HD) had come grips with its mistakes and began shedding marginal businesses, even shutting down its Chinese operations by 2012. Our analysts at Personal Finance added the stock to the publications Growth Portfolio not long after that, and since then the retailer’s share price has more than doubled. As Home Depot’s operating margins have improved, it has returned nearly $30 billion to its shareholders through buyback and steadily increasing dividends. Analysts even forecast that its earnings per share could grow an annual average of 14% over the next five years.
In fact, while December’s current retail sales growth was weaker than expected, it was still up by 3.2% on a year-over-year basis. In particular, fashion retailers and discount home goods stores saw stronger than expected same-store sales growth in the month, with Retail Metrics Inc reporting growth of 2.9%, beating analyst estimates. Car dealers are also reportedly expecting sales growth of better than 10% this year, spurred on by better job creation and lower fuel prices.
RadioShack’s failure was one of adaptation. While there are plenty of home improvement do-it-yourselfers out there, the cost of pretty every sort of electronic device has fallen to the point that most consumers simply toss broken items and buy new ones. And to say it was a late-comer to the cell phone game is probably pretty charitable, since the market dynamics in that niche were already shifting to a lower-margin, higher-volume model. RadioShack was simply too far past its prime.
That said, better positioned American retailers, like Home Depot or Nordstrom (NYSE: JWN), are likely to thrive along with the American economy. Home Depot’s 2015 EPS are forecast to grow by nearly 20% this year and 15% next as the US housing market continues picking up steam. Nordstrom’s forecast isn’t quite as rosy, with 2% growth expected this year and rising to 10% in 2016, but it is widely seen as a leader in not-quite-extravagant luxury merchandise. As consumers continue to gain steam, so will it.
While RadioShack may be going the way of the dodo, American retailers as a whole are still attractive growth investments.