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Gad: RadioShack Looks Fixable

The market's reassessment of the electronics retailer Best Buy (BBY) has been pronounced, and anyone who bought shares at the point of maximum pessimism has been amply rewarded.

At the beginning of this year, Best Buy shares were hovering around $12, amid concerns about how a large big-box electronics retailer could survive in a world dominated by smartphones and tablets that require very little shelf space. But Best Buy has convinced the skeptics, at least for now, and its $29 share price today makes the retailer's stock one of the best-performing of the year.

Hoping to accomplish the same type of magic is the much smaller retailer RadioShack (RSH - Get Report). At $3 a share today, shares in RadioShack are down nearly 90% in the past two years. What once was $2 billion company has now shrunk to a $300 million business.

RadioShack is aggressively working to right the ship. Its new CEO, Joe Magnacca, has deep merchandising and retailing experience from Walgreen, and the company has hired an investment-banking firm to help raise some capital. If RadioShack can successfully reinvent itself, its upside could likely be significantly better than what Best Buy has accomplished for its shareholders.

RadioShack has some plusses. First, its stores are very small by retail standards, a very good thing when your products are subject to rapid inventory obsolescence. One of Best Buy's biggest problems was the massive floor space being devoted to big-screen TVs and DVD players, while the fastest-moving and most profitable products -- smartphones and tablets -- required very little space. It's why Apple (AAPL) retail stores generate so much revenue and sales per square foot.

Second, RadioShack has a good balance sheet, an absolutely critical factor for any company that's in turnaround mode. As of March 31, RadioShack had more than $430 million in cash, against some $700 million in short-term and long-term debt. Nervous creditors can take comfort that RadioShack has the ability to easily pay its obligations for the next couple of years -- this is valuable it needs in order to find new direction.

But there are some very legitimate concerns. First, RadioShack is no Best Buy. After the bankruptcy of Circuit City, Best Buy became the only pure-play electronics retailing chain. Even though competition from Wal-Mart (WMT) was real, at least Best Buy wasn't dealing with a dozen other names. RadioShack has that problem as it competes with Best Buy and everyone else.

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