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RadioShack in the Woodshed

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RadioShack has hit the wall over the last couple months, after spending the first half of '07 as a market darling.

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Radio Shack (RSH) is being beaten with an ugly stick this morning after reporting numbers which were decent on the bottom-line but ugly on the top.

RSH has hit the wall over the last couple months, after spending the first half of '07 as a market darling. Part of the problem is simply the bloom coming off the rose on the turnaround efforts of CEO Julian Day. After closing stores and paring back traditional cell-phone sales, the revenue dip was expected.

Of more concern to the Street this morning is a certain vagueness in RSH's plans from here ("Be a solution"?... sorry, Julian, that doesn't make much sense). There's also a growing din of discontent coming from the stores as commissions drop while Day seeks to improve service levels.

When clerks don't know what it is they are supposed to do ("Glorified Stock-Person" versus "Sales Consultant"), chains run into serious problems. This is particularly true in electronics, as evidenced by the once-fierce battle between Circuit City (CC) and Best Buy (BBY). Way back when, CC and BBY were in a nip-and-tuck battle for the lion's share of the fast-growing consumer electronics sector. Then, about 15 years ago, roads diverged for the chains when Best Buy went to a bigger foot-print, less-service model. It took some time for customers and workers to adjust, but once Best Buy found its groove sales and profits exploded.

Circuit City, in contrast, stayed in their smaller stores and started a pattern of switching between a commission and no-service sales model that continues to this day. Best Buy is winning because both employees and customers know what they are getting into when they start a relationship with Best Buy. Circuit City is a mystery to work at or shop, and mystery and retail don't mix.

RSH is at risk of falling into the Circuit City trap. The company has tremendously labor-intensive stores. Think about trying to stock the endless packs of batteries, earpieces and gadgets. With employees seemingly growing disgruntled, and with a lack of clarity from the top as to whether RSH is a convenience (read: no-service) or solutions (read: over-promising) based chain, it's easy to envision the RSH shopping experience degenerating back to the bad old days of just a few years ago. For CEO Day and shareholders, this is the part of the Radio Shack turn-around where things get interesting.

RSH has improved wildly over where it was before Day arrived. Making the changes stick, however, is going to require more clarity of vision than we're getting this morning. Until that vision arrives, RSH is going to be a stock where selling rallies trumps buying dips.
No positions in stocks mentioned.

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