All Eyes On RadioShack’s New CEO In Upcoming Earnings As Losses Continue

by Trefis Team
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    Quick Take
  • RadioShack will report Q4 2012 and annual earnings on February 26.
  • The stock price has rallied strongly in the last month but fundamentals of the business remain unchanged in our view.
  • Revenues and profits expected to decline primarily due to industry challenges like showrooming.
  • Competitor Best Buy has been giving tough competition through its mobile stores and the new price matching policy.
  • RadioShack’s focus on the wireless business is reducing gross margins.
  • Among new developments, the company has terminated its partnership with Target and appointed a new CEO. However, in absence of unchanged industry headwinds and a turnaround strategy, we remain unenthusiastic about RadioShack’s prospects.

RadioShack (NYSE:RSH) will release its Q4 and annual results on February 26, 2013. The fundamentals of the company’s business remain unchanged from the previous quarter, primarily due to the challenges facing the consumer electronics retailing industry as a whole. Online retailers are steadily eroding brick-and-mortar retailers’ businesses. Hence, we expect RadioShack to report lower year-over-year revenues and profits for Q4. For 2012 as a whole, we expect the company to report much lower revenues than 2011 and a net loss. In the first nine months of 2012, RadioShack reported an overall loss of $76 million.

The company’s stock price jumped suddenly last month between the 24th and the 28th of the month. In this period it rallied from $2.30 per share to $3.20 per share. Since then, it has continued to make incremental gains. One potential reason for the sudden jump in January was short covering by a large number of investors. According to reports, about one-third of all available shares were being shorted. The fundamentals were unchanged, and they continue to be in our view. [1]

Early this month, RadioShack finally appointed a new CEO, bringing in Joseph Magnacca from Walgreen, the drugstore chain. However, we are yet to hear him articulate a turnaround plan.

See our full analysis for RadioShack

There are plenty of reasons to have a grim foreboding about quarterly and annual results.

Changing Nature of Consumer Electronics Retail

Retailers like Wal-Mart and Amazon are taking business away from pure-play consumer electronics stores by offering huge discounts. Customers are still using physical stores to check out products and gain hands-on experience with gadgets. However, a large number of them then proceed to buy these from online stores like Amazon at cheaper prices. This phenomenon of showrooming has hit business hard for companies like RadioShack. There was a new development this month when Best Buy (NYSE:BBY) announced making its price-matching policy permanent in order to put an end to showrooming. The company will match the prices offered by select online retailers and other brick-and-mortar competitors across a wide range of products, irrespective of whether the customer makes the purchase from a store or online. [2]

We think that while Best Buy can afford to take a hit on margins in exchange for market share, RadioShack doesn’t have the resources to follow in Best Buy’s footsteps. Through the first nine months of 2012, RadioShack’s revenue declined by just 1%, but gross margins dropped from 44.4% to 37.6%. The steady erosion in gross margins is largely responsible for the overall loss in the first nine months of 2012. Also, RadioShack’s cash pile has been declining steadily. At the end of Q3, it had cash and cash equivalents worth $546 million on its balance sheet, and this limits the room for RadioShack to take risky bets or even go for an acquisition of some sort, if it so desires. [3]

Lopsided Focus On Wireless Becoming A Liability

It is true that the company has been betting big on shifting to mobility devices like smartphones, but the problem here is again low margins. This segment is intensely competitive due to the presence of a large number of players. These include not just traditional rivals like Best Buy and players like Amazon, but also Apple Stores, plus AT&T and Verizon outlets. While devices like an iPhone contribute to higher sales due to big ticket prices, they yield very low margins due to the intense nature of the competition.

Also, there is intense competition from Best Buy’s “Best Buy Mobile” stores, which have a similar product mix. Best Buy has also decided to promote this chain of stores further, which is bound to result in further competition for RadioShack.

Ending Partnership With Target

On January 14, RadioShack announced an end to its relationship with Target, where it helps operate Target Mobile in 1,500 Target stores. The relationship will stand terminated effective April 8, 2013.

The RadioShack and Target partnership provides RadioShack access to manage Target’s post-paid mobility business, but RadioShack does not manage the prepaid mobility business or the wider range of accessories offered in Target stores. RadioShack had been attempting to renegotiate the agreement since October last year, and had already served a termination notice in the event that a new agreement couldn’t be reached. [4]

RadioShack’s stock didn’t show much movement when this announcement came, implying that it was already being factored into the stock price.

A New CEO

After months of stalling, RadioShack finally appointed a new CEO in the form of Joseph Magnacca, who was previously working as an Executive Vice President at Walgreen, a drugstore chain. The choice seems strange, given that Magnacca has no previous experience in the consumer electronics industry and has been working in the drugstore industry for over a decade. Given the dire straits RadioShack funds itself in, we wonder how he would be able to come up to speed with the business in a short time and put in place a turnaround strategy. While the stock price responded positively to the appointment, we would like to adopt a cautious attitude for now and wait for Magnacca to articulate a credible turnaround plan. [5]

We will be interested in the company’s comments on all of the above issues in the Q4 earnings conference call. What we are most interested in is the vision of the new CEO.

We have a Trefis price estimate of $2.5 for RadioShack, which we will be revising after Q4 results.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Don’t Get Too Excited About This Stock’s Jump, Motley Fool []
  2. Best Buy’s Permanent Price-Matching Policy Will Help Fight Off Showrooming, Trefis []
  3. RadioShack Q3 2012 10-Q, SEC []
  4. RadioShack and Target Dissolve Target Mobile Partnership, RadioShack News Release []
  5. RadioShack’s New CEO Faces Challenge as Profit Slides, Bloomberg []
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