RadioShack’s Results Show Lack Of Catalysts Amid Industry Headwinds

by Trefis Team
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RadioShack
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RadioShack (NYSE:RSH) announced its fourth quarter and annual results on February 26. As expected, the company reported a net loss for 2012 and low gross profit margins. While the company tried to sound optimistic about its high margin Signature business, the management had little else to offer by way of future growth opportunity.

The net loss stood at $139 million, as compared to a net profit of $72 million in 2011. Gross profit margins fell from 41.4% in 2011 to 36.7% in 2012. The decline in gross margins occurred primarily as a result of the decrease in the gross margins in the postpaid wireless business and in turn led to a net loss. The postpaid wireless business continued to struggle in the fourth quarter, in part due to product availability issues. Apple launched the iPhone 5 in September but availability in RadioShack stores for the first two months was poor due to supply issues. By the time it managed to build a good inventory in December, demand for the device was weaker.

RadioShack also recorded an overall annual decline of 2.7% in revenues driven by a 3.5% decrease in comparable store sales. Comparable store sales declined due to sales decreases in the consumer electronics and mobility platforms businesses at its U.S. company-operated stores. [1]

We think that lot of blame for the lower revenues and margins can be heaped upon industry factors which have shifted against RadioShack, but the company is equally guilty of failing to adapt itself to the changing nature of the business. As the business model looks outdated and despite what RadioShack claims, we see no real catalyst to drive future growth in the near term.

See our full analysis for RadioShack

Key Aspects Of Results

RadioShack continued to see year-over-year growth in its high margin Signature business, which generated growth of 2% in 2012. In particular, the wireless accessories and headphones businesses did well and RadioShack aims to focus on these going forward as well.

The company suffered losses due to poor performance of its Target mobile business. 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 consumer electronics business continued to experience sales declines in line with trends in the rest of the industry. Revenues declined from $861 million in 2011 to $662 million in 2012, a 22% decline. However, the company managed to arrest a decline in margins in this category and generated higher gross profits in dollar terms despite a steep sales decline. RadioShack’s smaller footprint does not allow it to carry the breadth of products that would make it competitive vis-a-vis other brick-and-mortar retailers and online channels. As a result, we expect this segment to remain under significant pressure going forward. [2]

No Details On Countering Competition

We were disappointed at the absence of any mention of steps RadioShack might be taking to counter competition from online sellers like Amazon and other brick-and-mortar stores. Market rival Best Buy (NYSE:BBY) recently announced a permanent price matching policy under which it will match the lower prices being offered by online retailers on most products. This is sure to drive business away from RadioShack in categories where it competes with Best Buy. RadioShack’s mobility business, largely responsible for its declining gross margins, competes with “Best Buy Mobile”, the chain of stores Best Buy is aggressively expanding.

RadioShack had reserves of $535 million at the end of 2012 but it also needs to make debt repayments of $287 million in 2013 which will reduce its financial flexibility in case it wishes to undertake new initiatives or acquisitions in order to diversify. The new CEO Joseph Magnacca didn’t articulate a turnaround plan in the earnings conference call. In the absence of this, we see no apparent catalyst for dramatic future growth.

We have a Trefis price estimate of $3 for RadioShack, which we will be revising shortly in view of the recent results.

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Notes:
  1. RadioShack 2012 10-K, SEC []
  2. RadioShack Q4 2012 Earnings Conference Call, Seeking Alpha []
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