Rumors about buying Radio Shack. Are you kidding me?

Oh Joy. According to newspaper reports, Dell is considering the purchase of Radio Shack. You know - the retail chain with 4,447 stores and 739 kiosks. The retail chain with 35,800 employees that sells all kinds of connectors, wires, nuts, screws, transistors, capacitors, diodes, and LOTS of batteries. Radio Shack also sells those radio-controlled racing cars.

An acquisition of a retail chain would provide Dell with a physical place to sell its computers, like Apple already does, but HP and Lenovo do not.

Radio Shack’s CEO, Julian Day, has the “Street cred” of a turnaround specialist – something that Dell needs. Day has cut costs and capital expenditures such that its gross margin improved by 300 basis points last year - due to improved inventory management and a favorable mix shift of products.

The result? Revenues in 2007 was revenues of $4.32 billion, representing a……decrease of 11% YOY, and an 8.2% decrease in comparable store sales – YOY.

Ooops. Isn’t that the wrong direction for a turnaround?

Radio Shack cited weakness in wireless and personal electronic segments as largely contributing to the declines – with particular weakness in post-paid wireless sales. However, sales held up in GPS devices, pre-paid wireless handsets, notebooks and related accessories, media storage, video gaming, and pre-paid airtime.

In 2007, Radio Shack repurchased $209 million of stock – which is a little bit higher than the $19mm share repurchase that Don Carty committed Dell to do this year. Radio Shack also paid out $33mm in dividends – which will likely end if Dell takes over.

Radio Shack doesn’t hold quarterly conference calls with investors – so we’re certain that Don Carty will take an immediate liking to Julian Day.

So what would be the deal to make Radio Shack the primary retail arm for Dell products? Radio Shack market cap is currently at $2.15 billion. A 20% premium makes the total deal valued at approximately $2.6 billion. This seems rich to us given Radio Shack’s current problems. Julian Day’s restructuring process has done the easy things such as close poor locations, control inventory and employee hours. The next step for Radio Shack will be changing its product inventory so that it will begin to carry products that appeal to customers with money to spend on electronics. That means fewer batteries, electronics parts, cordless phones and clock radios. That also means more big screen TVs, notebooks, game consoles and games.

We’ve been to many Radio Shack locations across the USA, and many are in locations that are NOT in big retail shopping malls. Many are in “out-of-way” strip malls that time has passed by. Therefore, we’re not convinced that selling Big Screen TVs and Notebook computers would be a good idea in those locations.

Let’s do some quick “back-of-the-envelope” math. Excluding the kiosks, Dell would be purchasing Radio Shack for approximately $585K per store. Dell’s FY2008 (for the fiscal year ending February 1, 2008 – so it’s almost calendar 2007) EBITDA margin is approximately 7.25%. In other words, if Dell’s average sale per unit is $2,000, then it would have to sell at least 1 PCs per day in every store.

Of course, the profit pay-back is a much higher hurdle. The EBITDA margin of 7.25% means that each $2,000 sale represents only $145 in profit. Take the $585K average per store, divide by 360 selling days. Then divide the resulting number ($1625) by $145 – to get 11.2 PCs per store – per day.

Of course, looking at their recent 10-K, we can seel that Dell sold $6.5 billion of servers, $5.3B in services and $2.4 billion in storage in FY2008. We also know that Dell sold $31.1 billion of product to Business, and $6.2 billion to US Consumer in FY2008. Dell also sells a lot of units to large businesses government, and US consumers via its on-line channel.

So what would Dell reasonably expect to sell in these retail locations?

You also have to assume that selling units in Radio Shack locations would be “new” sales which are not cannibalizing existing sales to small and medium businesses, as well as to all those US consumers purchasing units online.

Net Net Net, let’s just make the simple assumption that Dell is looking to double its US consumer sales business via the physical Radio Shack locations. There will be some current US consumer and business sales that are lost to the stores, but we will make some zero cannibalization assumption to get an idea of what is needed to make this work. That represents an incremental $6 billion revenue opportunity.

So, let’s do the math again. How many units does each location need to sell in order to generate $6 billion in sales. Each of the 4,447 locations would be expected to generate sales of $1.35 million. Over 360 selling days, that means 3,750 sales per store. At an EBITDA margin of 7.25%, using average selling price of $2,000 per unit, Dell would expect to sell 26 units per day – per store.

That is a far more difficult number to reach when many of the Radio Shack locations are “tired” and “out-of-the-way.”

Moreover, Dell would be entering another new business that it knows nothing about, though Julian Day may be encouraged to take on the task. With Dell’s backing, he may even show positive revenue growth rather than the double digit negative growth he achieved in FY2007 for Radio Shack.

However, at the end of the day, there is a basic question: why not make it worthwhile for Radio Shack to provide shelf space for Dell products? Why add the 35,800 employees, and running the retail operation? How will Don Carty control these expenses when Radio Shack stores are, in general, “tired” and will need a significant capital expenditure to “refresh” the stores to compete with Best Buy?

Why not work with them for a year, and see how it goes? Why does Dell need to additional headache? It’s not like it already has a lot of moving parts that need to be properly executed upon.

Oh Yeah. There are a LOT of moving parts in this supposed turn-around.

Then again, perhaps Dell should buy Radio Shack. Then they could sell terrestrial radios next to their computers while the Apple stores could stock big screen TVs and satellite radios next to their iPhones and Macs.