The Exchange

RadioShack Quarter Was Bad, but ‘Problem Began 30 Years Ago’: Analyst

RadioShack (RSH) had a brutal session Wednesday after the electronics seller posted an unexpected loss for the second quarter and suspended its dividend, saying it could make better use of its cash by putting the payout on hold.

In response, investors sent the shares down $1.05, or 28.8%, to $2.60 on the New York Stock Exchange, making RadioShack the worst percentage decliner in the U.S. for the day. The steep selloff left the stock in even more regrettable territory when viewed over the long term -- FactSet has data going back to 1984, and the current level is the worst point RadioShack has ever hit. Yahoo! Finance shows RadioShack with a 52-week high of $15.40, meaning the stock has lost more than 70% of its value from its best price of the past year.

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Along with the bad miss on the bottom line and the dropped dividend, revenue and same-store sales fell short of estimates, and gross profits slid. Basically, it was the kind of news that, if you're a shareholder, makes you wish you hadn't gotten out of bed.

Not all of RadioShack's difficulties are merely because of its doing -- electronics can be a devastating arena in which to do business. In the past five years, Circuit City and Tweeter Home Entertainment filed for bankruptcy. Best Buy (BBY) is still very much alive, but its shares have fallen two straight years, are down approximately 25% in 2012, and are now hovering right around where they were in November 2008. The gargantuan product line available on Amazon.com (AMZN) is often cited as the key enemy of the physical retailers, but even factoring it out, gadgets and devices can be found in any number of places you might choose to shop, either real-world or virtual.

However, some of the struggles at the Fort Worth, Texas, retailer are its own, and that's the concern for analysts like Michael Pachter of Los Angeles-based Wedbush Securities. When reached after he had gone over the numbers, Pachter was unsparing in his take on RadioShack. "Their customer base is eroding, and their management doesn't seem to recognize that," he said.

Phones and Services

Long known for items like batteries, bulbs and cables, RadioShack has in recent years diversified and added a host of mobile devices to its stores, including Apple's iPhone and the Samsung Galaxy S, as well as services from Verizon Wireless, Sprint (S) and AT&T (T).

And in a sense, that's part of the problem, Pachter says, because the leadership at RadioShack isn't focusing properly on the people visiting its stores. Executives, he says, like to talk about "phone customers, not the RadioShack customer. And management doesn't seem to get it."

The company has also missed out because its older customers, who have shopped at RadioShack for years, can buy batteries and other small necessities at stores like Rite Aid (RAD) and Costco (COST), or simply online. "They don't carry anything that's so essential that you must have it that second," he says. And for the less-aged, Pachter says RadioShack's got no chance right now.

"Younger customers won't be caught dead there," he says. "They're losing older customers, and they're not getting younger customers."

Eric Bruner, a spokesman for the company, said in response to a series of emailed questions that, as a matter of policy, RadioShack normally doesn't address analyst research and commentary directly.

However, he did say that RadioShack was proud of the convenience and the service customers received. "RadioShack has an unrivaled store footprint," he wrote. "We see several strengths inherent in this model: a convenient and comfortable store format staffed by knowledgeable, helpful store associates."

Addressing the phone and device offerings question, Bruner said the company's mobile business was designed to let customers decide among a variety of large U.S. wireless carriers and popular handsets, and to do so at competitive prices.

Missing Forecasts

In the latest quarter, revenue did actually increase, rising 1.2% to $953.2 million. But same-store sales, a key metric for retailers, were little changed, and both figures disappointed. Sales were forecast at $968.4 million for the quarter, according to a FactSet survey of analysts. Same-store sales were seen rising 1.8%, estimates indicate.

Gross profit was much weaker, dropping to $360.3 million from $432.1 million in the prior year, which the company blamed on lower-margin smartphones.

Further down the income statement, RadioShack fell to a loss of $21 million, or 21 cents a share, reversing a profit of $24.9 million, or 24 cents a share, in the same quarter a year ago. On average, the projection was for earnings of 3 cents a share.

Jim Gooch, RadioShack's president and CEO, said in a press release that the business "performed below expectations" in the past three months. "We were disappointed in our gross margin rate performance, as the initiatives we have under way have not yet generated enough momentum to improve the trend. However, we were pleased with the sales growth generated in the mobility category of our business."

Long-Term Problem?

For RadioShack, getting margins stable and "aggressively managing" costs are the primary points of focus, Gooch said in his prepared remarks. Part of bringing the expenses under control means stockholders will see the dividend, paid most recently at an annual rate of 50 cents a share, go on hiatus.

"This allows us to increase the amount of excess cash we'll use to pay down the debt, continue to invest in improving the business and ensure that we maintain our strong balance sheet," Gooch said in his statement.

Additionally, RadioShack is looking to refinance about half of its $375 million in debt that's maturing next year. Currently, the company has nearly $518 million of cash and $392.5 million left on a $450 million revolving credit line that expires in January 2016. As of June 30, long-term debt totaled $679 million.

"Despite challenging results this quarter, we are continuing to make progress in top-line sales-growth initiatives that we believe will deliver value over time to our long-term shareholders," Bruner said.

To Pachter, RadioShack is facing a situation in which its stores aren't doing much to be a must-shop retailer, partly because of management missteps but also because of the nature of specialty retail. In order to compete effectively in a niche, he says stores need a private label like Abercrombie & Fitch (ANF), offerings that can't be easily measured online, such as furniture, or services that can't be captured well electronically, like matching two paint colors.

"They don't have any of those," the analyst says. "I don't mean to suggest they're going to zero tomorrow," but the customer base will dwindle, he predicts. RadioShack will probably hope that additional advertising can help improve its fortunes, Pachter says, but he's not confident that's going to noticeably alter the situation.

"I think the problem began 30 years ago," he says.

One thing that's certain is that at RadioShack's peak in 1999, it was trading in the upper $70s. It's a long way from that, and it may very well be a long way back.

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