The Exchange

RadioShack: Overvalued or Too Cheap to Pass Up?

The Exchange

RadioShack (RSH), despite its best efforts to adapt to the wants of today's electronics buyer, continues to see its financial results pay a heavy price for its new model.

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Phones in a RadioShack store: Credit Reuters
The Fort Worth, Texas, retailer, which is becoming increasingly dependent on phones as its business, has no dividend, no profits, no chief executive, declining margins and a stock price that's lost 82% in the past year. So is it a good buy?

Somebody thinks so. In premarket trading, the stock had slumped 15% to under $2, but at least one investor saw value in the stock, even if just for a day, and started giving it a boost. Recently, shares of RadioShack were up 7 cents at $2.46 on double the normal volume. Most Wall Street models don't have it worth that much. The stock is now about 10% above the consensus price target of $2.23, according to FactSet data.

About the Phones

On Tuesday, it reported its third consecutive quarterly loss, 33 cents a share excluding items, and missed expectations. Sales edged down to $1 billion from $1.03 billion in the prior year's third quarter. Same-store sales fell 1.6%.

RadioShack, which is transforming into a wireless phone and phone accessories seller more than anything, has changed its business rapidly. During 2011, its mobility business, which includes postpaid and prepaid wireless phones, prepaid usage and tablets, reached 51.4% of its revenue, up from 44.2% the previous year. In RadioShack's U.S. company-operated stores, the mobility business was 35.3% of sales in 2009. That jumped to 46.1% in 2010 and then to 50.6% last year. On the conference call that followed the third-quarter results, the conversation was almost exclusively about phones. Here's what that's produced:

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RadioShack sales and earnings

For the business, the focus on phones has weighed on margins and gets much of the blame for the bottom-line deterioration. Dollar-wise, gross profit, again on what were essentially flat sales, decreased by $82 million. Gross margin itself fell by 6.8 percentage points year over year to 36%. As RadioShack puts it simply: "Smartphones generally, and the iPhone in particular, carry a lower gross margin rate, given their higher average cost basis."

Willingly becoming more dependent on a product that eats into profits typically isn't ideal, especially when that same product can be bought from multiple other locations, including digital ones (for added perspective, see Best Buy). But this is the world RadioShack has to operate in, and as noted above, someone sees a bargain, at least when the shares drop under $2.

"Clearly, our third quarter was disappointing," Dorvin Lively, the interim CEO since the company parted ways with James Gooch last month, said on the post-earnings call. "As we stated on our second-quarter conference call, we expected Q3 to be a difficult quarter, particulary on the gross margin front, and it turned out to be even more difficult than we had expected."

Lively said that the fourth quarter has "started off slower than we would have liked, primarily due to the continued short supply of the new (Apple - AAPL) iPhone 5 handset."

For the new version of the iPhone, he still sees "strong demand and short supply," and RadioShack is awaiting its further allotment from Cupertino. Apple's latest phone, released just weeks ago, quickly sold out of its initial inventory.

"As we look to 2013 we're continuing to be focused on stabilizing the profitability of our business, and clearly our most critical challenge at this point is stabilizing the gross margin and profitability of our mobility business," Lively said.

Can it be met, given the cost structure?

What's Selling

Outside of mobility, where third-quarter sales were down 2.9%, sales of consumer electronics -- TVs, cameras, laptops -- slid 22%. On the plus side, revenue from RadioShack's signature business (the company's designation) rose 3.8%. This is the division that includes various accessories, along with power and technical products, the kinds of goods RadioShack was known for during most of its history.

High-margin wireless accessories, Lively noted, have been a bright spot for RadioShack, and he added that the company's stores are "increasingly becoming a destination" for those items. Headphone sales also continue to "grow nicely," he said.

What's next for RadioShack? Its board is still looking for a new CEO. It has executed a termination notice for its post-paid mobile selling agreement with Target (TGT), on which it loses money, though it is hoping to work out a restructured arrangement. It's got a fourth quarter that's started out on not the best footing. Normally the final quarter of the year is the biggest for sales, as it is for most retailers, so stay tuned. A quarterly profit is projected by analysts who cover the company, which again would be the first of the fiscal year.

One interesting nugget should emerge in the next couple of weeks, when institutional shareholders disclose their positions. During the second quarter, only four of RadioShack's 20 largest investors decreased their holdings in the stock, FactSet data show. At the same time, 15 added to their stakes, while one was unchanged. Since those numbers were released, the company has had two weak quarters including the latest, so it will be worth seeing which way the big money is leaning next time - and how much confidence they have in the business plan.

Now decide whether you do. Is RadioShack a value play here? Or is the business too difficult of a place for the company?

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