Radio Shack - Pink Slips and Reputation Slips

Apparently, 400 Radio Shack employees got pink slips in their e-mail this week saying,"Unfortunately, your position is one that has been eliminated."

What does this tell you about the business?

With about 5,000 stores and another 777 kiosks, this has been a business that historically generated a great deal of free cash flow (year to date CFFO is -$91 million before capex of $47 million.) It has historically bought back a great deal of stock, last year buying back(net of issuance) almost $600 million. Return on invested capital has been over 20% for the last three years.

So, to some degree, at least from a very superficial analytical standpoint, RSH may be worth a peek.

But there's a lot more to portfolio management or business management than just the numbers. Reputation and integrity count. Management does count. Despite the popular depiction of many managements as greedy, or Scrooge-like, there are many that are not.

Apparently, RSH management seems to lack class. Management claims that it was important to notify people as quickly as possible. Employees had 30 minutes to collect their thoughts, make phone calls, and say goodbye to fellow employees. But how dehumanizing! Not even a few minutes of management time for the exit interview, an opportunity to thank you for years of service, a chance to personalize the process and to wish the faithful employee good luck!

Contrast this with the send-off received by former Chairman and CEO Len Roberts who was getting $41 grand a month to provide "advice" for 31 months plus office space and an assistant at $100 grand a year. What about the credibility that was lost when it was discovered that former CEO David Edmondson had fabricated his educational credentials and had claimed that the college from which he had "graduated"  had misplaced his records not to mention that his diploma had burned in a fire. What about the hurried resignation of the Chief Operating Officer announced Aug 18th and effective today?

The motto of this company has been: "You've got questions...we've got answers?"

My question is, "Do you know anything about reputation management?"

Reputation and integrity count and it seems that the further down that RSH reputation gets, someone in management finds a way to dig even deeper. Problems seem to turn into crises very quickly at RSH whether media or blog driven!

Reputation must be managed as aggressively as any other aspect of management. Reputation influences a lot of things: customer loyalty, attracting good employees, getting a multiple on the stock. Bad things happen to good companies which provide opportunities for investors who have confidence in management's ability to turn things around. So far, the preponderance of evidence has yet to build a case for confidence.

Poor handling of employee dismissals given the difficult times that this business has recently seen provides little excuse for potential shareholders to even bother studying the financials.

So I haven't!

Disclaimer: Neither I, my family, nor clients have a current position in Radio Shack.