RadioShack Reports Another Loss As Management Lays Out Turnaround Plans

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Trefis
RSH: RadioShack logo
RSH
RadioShack

RadioShack (NYSE:RSH) announced its first quarter results on April 23. As expected, the company reported a net loss for the quarter and declining gross profit margins. The company sounded optimistic about its high margin Signature business and the management offered a glimpse of its strategic vision for the future.

Net loss stood at $43.3 million as compared to a net loss of $8 million in Q1 2012. Gross profit margins fell by 0.8% from last year to reach 39.7%. The decline in gross margins occurred primarily as a result of lower gross margins in the postpaid wireless business and in turn led to a net loss. On the brighter side, the company saw stable margins in the signature business and improving margins in the consumer electronics business. The gross margin rate, excluding the postpaid business, increased slightly in the quarter. [1]

RadioShack also recorded a decline of 7% in revenues and a 5.7% decrease in comparable store sales. Comparable store sales declined due to sales declines in the consumer electronics and mobility platforms businesses at its U.S. company-operated stores.

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We think that lot of the blame for 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. Most of the solutions offered by the company sound rehashed.

See our full analysis for RadioShack

Key Aspects Of Results

Sales in the mobility platform decreased by 7.9% for the first quarter of 2013 compared with the same period last year. This was primarily driven by decreased sales in its postpaid wireless business, offset partially by increased sales in the prepaid wireless business.

The sales decrease in the postpaid wireless business was due to a 25% decrease in the number of postpaid units sold, offset partially by an increase in average revenue per unit sold. The number of postpaid units sold declined due to inventory supply constraints for certain in-demand devices, a lack of new iconic handset launches in the quarter and a lower store count. The total number of stores have declined by 104 compared to last year. RadioShack reoriented its sales mix towards higher-priced smartphones which resulted in higher average revenue per postpaid unit.

The retailer continued to see growth in its high margin Signature business for the fifth consecutive quarter, which generated year-over-year growth of 0.8% in the first quarter of 2013. In particular, wireless accessories, power accessories, music accessories, and portable speakers did well and RadioShack aims to focus on these products going forward as well.

The company suffered losses due to the poor performance of its Target mobile business. The losses before income taxes in the business for the quarter stood at $8.3 million compared to $5.3 million last year. 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 a sales decline, in line with trends in the rest of the industry as sales of laptop computers, digital music players, televisions, GPS devices and cameras dropped. Revenues from the business declined by 25.3% in the first quarter.

Turnaround Plan

RadioShack’s management offered a broad overview of how it plans to tackle the dire challenges facing the company. The initial priorities will be building the right management team, reinvigorating the store experience and its brand.

Last week, it hired a new Chief Marketing Officer and a new Senior Vice President of Store Concepts. Jennifer Warren, the new Chief Marketing Officer, has extensive experience in developing strategy and building top-tier brands in the mobile and retail categories, including Wal-Mart, Sam’s Club, Marshall’s, TJ Maxx, Zales, Kinko’s, Dell and Hallmark. Michael DeFazio, the new Senior Vice President of Store Concepts, will decide the look and feel of the company’s store presentation.

RadioShack has decided to rationalize the number of brands it stocks and also lay more focus on private brands. It plans to revive its technology innovation capabilities and there are some products in the pipeline. The company will also take a closer look at the product assortment in each store and try to tailor it according to consumer behavior in a store’s catchment area. It expects this to lead to higher productivity from a reduction in the Stock Keeping Unit (SKU) count and a better customer experience.

There are also plans for more visible advertising and promotion of the RadioShack brand on new-age media platforms and revamped stores which will emphasize an interactive experience. [2]

A lot of what RadioShack’s management talked about has been promised over the years. This includes the changing of store formats, the reorientation of the product mix and better advertising. The proof of the pudding is in the eating, hence we shall remain skeptical of the company’s ability to deliver till the time things start changing on the ground. To us, it seems that RadioShack is not keen on taking on competition from online retailers at this stage since there was no word on adopting a price-matching strategy similar to the one deployed by Target and Best Buy. The overwhelming onus for driving profitability seems to be on the private brands.

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 Q1 2013 10-Q, SEC []
  2. RadioShack Q1 2013 Earnings Conference Call, Seeking Alpha []