Chief executives aren’t supposed to cut their way to prosperity. But for a while, Julian Day appeared to do exactly that at RadioShack.
Unconcerned about falling sales and unfazed by bridges burned along the way, his turnaround of the company appeared to be a smashing success, judging by cash flow and Wall Street.
In Day’s first year, RadioShack’s stock price almost tripled, and he topped every individual performance hurdle. At one point, his four million stock options had a paper value of nearly $85 million. But in May, when the 58-year-old Brit stepped down as chairman and CEO after almost five years, his star had faded—and so had the payoff.
It’s one thing to slash and burn to pump up the cash flow. It’s much tougher to create a sustainable growth story, and Day never delivered on the more important score.
As a subplot, he also alienated the local business community, embarrassed the city’s elected leaders, and demoralized his employees. In the end, Day demonstrated that the bottom line isn’t the only line that matters.
Day was recruited to lead RadioShack in July 2006, after a résumé scandal engulfed the previous CEO. At the time, most people didn’t realize the serious problems elsewhere.
In the late 1990s, RadioShack was among the top-performing stocks in the S&P 500 and had been livin’ large. Riding the wave in wireless phones and consumer electronics, it added stores, workers, and a gleaming campus on the Trinity River in Fort Worth.
Revenue grew by almost $1 billion dollars from 1999 to 2005, but SG&A (selling, general, and administrative expenses) swelled faster. In six years, overhead rose by $416 million, or 28 percent. Then operating income dropped by more than a third in 2005.
Soon after, then-CEO Dave Edmondson was forced out for lying on his résumé, and the retailer seemed adrift. Along came Day, who was splitting time in Massachusetts and Montana. A fit distance runner, Day was known as a top finance man; he made his reputation by helping restructure Safeway, Kmart, and Sears. At RadioShack, he took out a sledgehammer and promptly produced results.
RadioShack had always been a cash-generating machine, netting big margins off the little parts in its ubiquitous stores. But in the quarter before Day arrived, cash flow fell two-thirds, to $36 million. Within 12 months, Day nearly tripled that number, boosting the most-watched metric at the company and the biggest factor in incentive pay.
RadioShack closed almost 500 stores, laid off more than 1,100 employees, and eventually sold its headquarters and leased back about a third of the space. It cut spending on travel, training, and employee savings plans by half or more. It changed its vacation policies to save $14 million. The company even sold off office plants to eliminate the upkeep expense.
“I just want you to know that a review of costs around here has now become a way of life,” Day told analysts in his 10th month. “It is a core focus of ours.”
RadioShack cut advertising by $54 million. And payroll, the big nut, declined from $826 million in 2005 to $618 million in 2008.
As morale sunk, many speculated that Day was stripping RadioShack in preparation for a sale. That idea gained currency, because Day was such a non-factor in the community. He didn’t make speeches, dine with local CEOs, or attend black-tie events to honor RadioShack. But he still hit up Fort Worth for $10.7 million in tax breaks, simply for extending a rental lease.
If Day were running a hedge fund, no one would have cared that he was reclusive. But RadioShack had been one of the city’s great benefactors for generations, led by its CEOs. Charles Tandy helped build downtown. John Roach elevated nearby Texas Christian University. Leonard Roberts built the riverfront campus that anchors the Trinity River Vision project.
Day’s job was to fix RadioShack, not serve as Fort Worth’s booster-in-chief. But most top executives juggle such public assignments intuitively, almost effortlessly. That Day restricted himself to such a tight box—and refused to adjust as complaints grew—should have been a tip-off that he was one-dimensional.
Stanley Block, who has taught finance at Texas Christian University for 44 years, called him a dismissive CEO. Block says he can’t recall any top executive so indifferent to the community where he lived.
Day didn’t just stiff-arm Fort Worth. He barred reporters from annual meetings and talked to analysts just once a year. He didn’t defend his policies publicly, either. A few months after he arrived, RadioShack fired 400 workers via e-mail, and the company was mocked nationwide. (My favorite headlines: “Radio Sacked” and “Read This E-Mail—Then Scram.”)
The move wasn’t as cold-blooded as portrayed, but Day never explained his side. A month later, his pubic relations chief was gone.
Defenders made excuses, saying Day had a laser focus on the turnaround. His relentless cost-cutting was prescient, because the Great Recession hit a year-and-a-half later. Competitors Circuit City and Ultimate Electronics eventually went bankrupt, while lean-and-mean RadioShack piled up cash and profits.
But Day lacked an urgency about goosing sales that was reminiscent of his blind spot in the community. He didn’t name a merchandising chief for 17 months, and didn’t articulate a retail strategy for even longer.
Same-store sales fell 0.6 percent in 2008, not bad for such a downturn. But they rose just 1.3 percent in 2009 and 4.4 percent in the rebounding year of 2010. Then they fell in the first quarter of 2011.
These aren’t dismal results, but they’re disappointing in a retail business that sells iPhones. As Day’s miracle petered out, so did the stock price.
In his last month on the job, RadioShack’s market cap was lower than before he arrived.
Mitchell Schnurman is an award-winning business columnist for the Fort Worth Star-Telegram.