RadioShack Expected To Report Soft Q1 Results

RadioShack (NYSE:RSH) will declare its Q1 2013 results on Monday, April 22. There have been no fundamental changes in the company’s business since the last earnings results and it continues to face strong headwinds in the marketplace. In line with trends observed in the previous quarters’ results, we expect it to report flat or declining revenues.

After being part of the American retail landscape for more than 90 years, the iconic RadioShack brand is today struggling to survive. The landscape of the consumer electronics retail industry has changed rapidly in a matter of few years with the entry of online players like Amazon. The traditional brick-and-mortar retailers are gasping for breath and those without ample resources face the threat of extinction.

The company doesn’t seem to have enough firepower on its balance sheet to make any aggressive moves in the market to challenge bigger and better equipped rivals. Put simply, the business model looks outdated and there seems to be no growth catalyst in place to inspire confidence among investors. The new CEO, Joseph Magnacca, has yet to articulate his 100-day turnaround plan for the company. We hope that a plan will be outlined in the earnings conference call or soon thereafter.

See our full analysis for RadioShack

Here’s a quick recap of the factors which we think will cause RadioShack to post uninspiring first quarter 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. Best Buy (NYSE:BBY) recently made its price-matching policy permanent 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. ^[1]

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. In 2012, RadioShack’s revenue declined by just 2.7%, but gross margins dropped from 41.4% to 36.7%. The steady erosion in gross margins is largely responsible for the overall loss in 2012. ((RadioShack 2012 10-K, SEC))

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. This limits the maneuvering space for RadioShack to experiment with new business models in this segment.

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 intense competition.

Target Stores

RadioShack 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. However, the relationship stood terminated only on April 8, 2013. Hence, the negative effect will continue to be felt in the first quarter results as well, dragging down earnings.

No Information On A Turnaround Strategy

We are disappointed at the continued absence of any news about steps RadioShack might be taking to counter competition from online sellers like Amazon and other brick-and-mortar stores. According to analyst David Schick, RadioShack has already trimmed costs to the maximum possible extent. It should now look for a strategy shift by increasing brand visibility, shutting down some stores and focusing on its private labels. The suggestions seem logical but we will have to wait for the earnings conference call to see whether Joseph Magnacca has something different in mind. ^[2]

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 to diversify.

We have a Trefis price estimate of $3 for RadioShack.

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

1. Best Buy’s Permanent Price-Matching Policy Will Help Fight Off Showrooming, Trefis [↩]
2. Stifel says RadioShack needs strategy shift, Bloomberg Businessweek [↩]