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RadioShack struggles in a wireless world

In 1971, Steve Jobs and Steve Wozniak hawked tiny machines called Blue Boxes that allowed long-distance phone calls to be made free by mimicking certain tones.

“If it hadn’t been for the Blue Boxes, there wouldn’t have been an Apple,” Jobs once said, according to Walter Isaacson’s biography, “Steve Jobs.”

The parts for the original Blue Box, a collection of diodes and transistors, came from RadioShack.

RadioShack once held a central place in the imagination of young minds and the world of technology, selling one of the first mass-market computers (the TRS-80) nearly 40 years ago.

But the digital revolution left it behind long ago, along with staples like tape recorders, landline answering machines and digital cameras.

After nine decades in the business, the company’s pulse in the electronic marketplace has grown as faint as a fading battery.

Its stock price is so low – it was trading at 61 cents Wednesday – that it may face delisting within the next few months by the New York Stock Exchange. When it tried this spring to stop the hemorrhaging with plans to close 1,100 of its stores, its lenders balked. Some analysts predict the company could run out of cash as early as next year.

“It’s been death by 1,000 cuts,” said Anthony C. Chukumba, an analyst at BB&T Capital Markets. “I just don’t see anything the company is doing that is likely to really stop the bleeding.”

The company declined to make any executives available for interviews for this article.

Three fundamental market shifts in recent years have eroded RadioShack’s relevance to consumers: changes in retailing convenience, the evolution of wireless and the diminution of the market for the bits and parts that form the inner workings of many a device.

One of RadioShack’s most profitable businesses was long rooted in selling component parts that could be cobbled together by those who wanted to build something new, like Wozniak, or for everyday consumers who wanted to open their gadgets and tinker. Rows of cables and connectors for stereos and TVs were stocked. For wire or a circuit board, RadioShack owned the market, with high profit margins.

Today, the appetite for those parts is a small fraction of what it once was.

“It used to be if you had a consumer electronic and it broke, you could open it up and figure out how to fix it yourself,” Chukumba said. “Now, I challenge you to open up your iPhone.”

Another major market shift blasted the foundation off RadioShack’s bedrock strategy: to be as convenient as possible.

“If you think about the world 20 years ago or 15 years ago, what was really important in retail? The word is convenience,” said David Schick, a managing director at Stifel. “Today, the way Americans think about convenience is very different.”

In fact, earlier this year, more than 1,000 of RadioShack’s stores proved to be more of an albatross than an asset.

In March, RadioShack publicly announced that it wanted to close up to 1,100 locations only to have to admit two months later that its lenders had shut the plan down. Industry watchers described the episode as damaging, revealing tension between the retailer and its lenders that RadioShack could ill afford to disclose. RadioShack’s credit agreement allows it to shutter only 200 stores a year, or 600 stores for the life of the agreement, which expires in 2018.

At the end of its last quarter, RadioShack had $62 million in cash, $362 million available in a credit facility and $615 million in debt. It lost nearly $100 million that quarter.

Perhaps the single biggest drag on RadioShack over the last few years has been the shift in wireless technology, the very technology it looked to for a revival during an earlier rough period.

The company made a substantial bet on wireless in the mid- to late 1990s. At the time, the market for cellphones was expanding rapidly, and the devices were a good fit for the small stores. But business in today’s saturated wireless market – Forrester Research predicts that there will be more than 267 million unique cellphone and smartphone subscribers in the United States this year – competition is fierce and margins are low.

“The pricing power is all with the wireless companies, and those wireless companies are all competing among themselves,” said Mickey Chadha, a senior analyst at Moody’s. “RadioShack is reactive; they can’t be proactive about pricing.”

The shift to smartphones also further cannibalized RadioShack’s other inventory, lessening the need for digital cameras, GPS devices and the cables and cords that would connect devices.

“What RadioShack didn’t do was they didn’t reinvent themselves,” said Schick of Stifel. There is often trouble in the water, he continued, “if every year that goes by, you say you’ll manage.”

For the last year and a half, however, the company has been scrambling aggressively to right itself. It brought in a new chief executive, Joseph C. Magnacca, who was widely seen as successful in revamping Duane Reade before it was sold to Walgreen. Magnacca was also recently appointed to the board of American Apparel, another struggling retailer that has recently made headlines, in its case for a highly public ousting of its founder earlier this summer. A little known hedge fund, Standard General, is one of the biggest shareholders of RadioShack stock and a major stakeholder in American Apparel. A Standard General partner has a seat a on the American Apparel board along with Magnacca.

Magnacca and his team have put a plan in place to try to turn around the brand, and fill its stores with unique, higher-margin merchandise.

“All these turnaround strategies could work. However, we don’t see any evidence of it working thus far,” said Chadha of Moody’s. “The problem is the runway they have to make the turnaround strategy successful. The runway is getting shorter because the liquidity is getting worse.”