Why RadioShack Demise Could Be a Boon to Best Buy

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As the vultures slowly but surely continue circling RadioShack Corp. (NYSE: RSH), how long the company can hold out continues to be a widely discussed topic on Wall Street. RadioShack has said flat-out that it is running out of money, reported a huge second-quarter loss of $137 million and has seen comparable same-store sales decline by a stunning 20%. For many handicapping the end game, it is not a question of if, but when.

A new research report from Deutsche Bank makes the case that the demise of RadioShack could prove to be a positive for electronics retailer Best Buy Co. Inc. (NYSE: BBY). As bleak as the RadioShack picture is, the company is estimated to have total sales of $2.98 billion in 2014. The bottom line, according to the Deutsche Bank team, is if RadioShack closes the doors on 5,000 stores across the United States, the business will go somewhere. They think Best Buy will get a large chunk of it. One interesting twist Monday was an analyst’s suggestion that Amazon.com Inc. (NASDAQ: AMZN) should consider buying some RadioShack locations if it goes into bankruptcy.

Best Buy currently has a 23% share of the consumer electronics market, according to data from TWICE magazine that was in the Deutsche Bank report. The analysts figure that if Best Buy captures half of that, or 11.5%, from a demise of RadioShack, it could add as much as $341 million in additional domestic sales, which would increase domestics comparisons by a full 1%. They also think it could add $0.11 per share to the bottom line, and that would be substantial to say the least.

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The Deutsche Bank team also feels that Best Buy sees a 17.9% flow-through rate, that translates to $61 million in earnings before income taxes. The Deutsche Bank analysts estimate that sales from RadioShack flow to Best Buy at an average merchandise margin, which they feel is conservative because RadioShack indexes to higher margin categories than Best Buy. The Deutsche Bank analysts figured the flow-through rate based on current domestic gross margins and merchandise margins.

One thing is for sure, while Radio Shack customers will have to go somewhere, it would seem that Best Buy would be reluctant to add all the products that Radio Shack currently carries. They most likely would focus on the higher margin bigger electronics and smartphone/tablet businesses, and leave the smaller electronic products and adapters category for someone else to pursue.

For many baby boomers, and even Generation X, the end of RadioShack is the end of an era that included products from Heath, with which people actually assembled everything from stereo gear to shortwave radios on their own. In today’s age of everything faster and now, there are probably few consumers with the patience to put together their own electronics. That change in demographics, and the need for immediate gratification, may be one huge reason in the overall multiple failures at the company.

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