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RadioShack to Underperform

Zacks Equity Research

The nightmare of RadioShack Corp. (RSH) persists as the company continues with its disappointing performance. Second-quarter 2012 financial results were well below the Zacks Consensus Estimates.

Management has suspended its dividend in order to reduce its debt burden. 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. RadioShack’s core consumer electronics retail business is on a secular downtrend and is unlikely to be revived in the near future.

Consumers increasingly prefer online purchasing to visiting retail stores. Loss of foot traffic has severe negative impact on RadioShack’s business. Most of the consumers prefer tablets and smartphones, which are less profitable for the retail industry. We do not find any immediate growth catalyst and therefore downgrade our recommendation on RadioShack to Underperform.

RadioShack is facing bottom-line pressure for its lucrative wireless platform. In the previous quarter, the company suffered a net loss of $21 million.

Moreover, the company delivered a 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 in achieving future business from Verizon Wireless, it believes that Verizon business needs more consumer awareness and spend increasing amount for marketing. Verizon is a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group plc. (VOD).

We expect the wireless division revenue to remain almost the same in 2012. RadioShack also forecasted its net income to decline further in 2012.

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