We downgrade our recommendation on RadioShack Corp. (RSH) to Underperform based on its disappointing performance. We do not find any immediate growth catalyst and consequently do not expect the company to achieve profitability anytime soon.
Why the Downgrade?
A major near-term concern for RadioShack is the significant decline in its gross margin. In the second quarter of 2013, gross margin was 37.2% compared with 40.1% in the prior-year quarter. This was mainly due to an unfavorable sales mix of lower-margin smartphones and other mobile devices.
Importantly, RadioShack announced that this trend will continue in the near future due to revamping of the core retail electronics segment. We believe RadioShack has lost its market leadership as a high-margin device retailer and is eventually transforming into a low-cost low-margin device supplier.
Moreover, consumers now prefer purchasing online to visiting retail stores. Declining foot traffic has severely affected RadioShack’s business. Most of the consumers prefer tablets and smartphones, which are less profitable for the retail industry. The core retail business of RadioShack, namely, the consumer electronics (including digital TVs, digital music players, and digital cameras) platform continues its free fall.
Importantly, core businesses have some material effect on the Wireless business. Core businesses indirectly drive wireless sales through increased foot traffic. Most of the customers who entered RadioShack stores intending to buy core products were generally attracted toward its latest wireless offerings.
Other Stocks to Consider
RadioShack currently has a Zacks Rank #5 (Strong Buy). While we prefer to avoid RadioShack until we see signs of improvement in the company's performance, other electronics retail stocks worth a look are Best Buy Co. Inc. (BBY), GameStop Corp. (GME) and hhgregg Inc. (HGG). All these stocks carry a Zacks Rank #2 (Buy).