RadioShack to Underperform

Zacks

RadioShack Corp. (RSH) difficulties persist as the company continues with its disappointing performance. Precipitous decline of the signature and consumer electronics retail businesses, adverse product-mix toward low-margin devices, and a volatile macro-economic scenario in the U.S. are taking a toll on the company’s financials.

Weaker-than-expected growth of the mobile platform and growing marketing expenses are other near-term concerns. The company provided a tepid outlook for fiscal 2012.

In the previous quarter, the U.S. RadioShack company-operated store segment, which is the prime contributor of total revenue, was down 1.4% year over year. We believe RadioShack lost its market leadership as a high-margin device retailer and is eventually turning out to be a low-cost low-margin device supplier. We do not find any immediate growth catalyst and therefore downgrade our recommendation to Underperform on RadioShack. 

RadioShack is facing weak bottom line due to costs associated with transition from an adverse product mix toward low-margin smartphones, T-Mobile to Verizon Wireless partnership, and underperformance of its businesses with Sprint Nextel Corp. (S). Although management remains confident of achieving future business from Verizon, it believes that Verizon business needs more consumer awareness and the company will spend increasing amount for marketing.

We expect the wireless division revenue to remain almost same in 2012. Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group plc. (VOD).

The prolonged macro-economic fluctuations in the U.S. may turn out to be the biggest threat for the consumer electronics retail industry. RadioShack expects its net income to decline further in 2012. In November 2011, management announced a $200 million share repurchase authorization that the company had intended to complete within 12 months. However, after repurchasing 930,000 shares for $11.9 million in the previous quarter, RadioShack suspended it share buy-back program.

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