Being a prominent player in the retail business for over 90 years, RadioShack (NYSE:RSH) has been struggling to survive in the industry as the level of competition has risen manifold in the last few years. In addition to eroding top line growth, it has been seeing declining gross margins over the years which has impacted its bottom line. Q1 2013 was no different as the company registered a 7% annual decline in revenues, 5.7% decrease in comparable store sales and a net loss of $43.4 million compared to a net loss of $8 million in Q1 2012
RadioShack is expected to declare its Q2 2013 earnings on July 23. While it did lay out a number of steps to turn around its business last quarter, we remain cautious about the company’s outlook until we see any visible results from its new strategy. A lot of what RadioShack’s management talked about has been promised over the years. This includes a change to store formats, the reorientation of the product mix and better advertising.
While we think that RadioShack could manage to return to positive growth this year, we believe the below mentioned challenges continue to put pressure on its business.
Increasing Threat From Online Retail Giants
Showrooming, a phenomena where customers use physical stores to check out products and gain hands-on experience with gadgets, but use online stores to make the purchase, has negatively impacted the sales of traditional brick-and-mortar retailers. The entry of online retail giants such as Amazon has altered the landscape for the consumer electronics market.
Best Buy (NYSE:BBY), a competing physical retailer, recently made its price-matching policy permanent to put an end to showrooming. The company now matches 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. It claims to be witnessing a positive response for the policy so far.
In its turnaround plan, RadioShack made no mention of a competing policy or strategy to deal with rising competition from online retailers. The overwhelming onus for driving profitability seems to be on the private brands. Its initial priorities will be building the right management team, reinvigorating the store experience and its brand.
Lower Revenues From The Target Mobile Business
Due to the poor performance of its Target Mobile business, RadioShack has been incurring losses from the division. The losses before income taxes from this division stood at $8.3 million in Q1 2013, compared to $5.3 million in Q1 2012. RadioShack terminated its relationship with Target where it helped operate approximately 1,500 Target Mobile stores, effective April 8, 2013. Declining revenues from Target lowered RadioShack’s Q1 2013 earnings, and we think the trend will persist in Q2 2013 as well.
Increasing Focus On The Wirless Division Put Pressure On Gross Margins
RadioShack’s gross margins have declined from 45.4% in 2008 to 36.7% in 2012. At 39.7% its gross profit further fell by 0.8% y-o-y. RadioShack has been betting big on shifting its focus to mobility devices like smartphones, an area which is expanding fast but offers comparatively lower margins. Its revenue contribution from the mobility division has risen from 44.2% in 2010 to 51.4% and 53.1% in 2011 and 2012, respectively.
The wireless segment is intensely competitive due to the presence of a large number of players including not only traditional rivals like Best Buy and Amazon but also Apple Stores, AT&T and Verizon outlets. While smartphones such as iPhone contribute to higher sales due to their high prices, they yield very low margins for retailers such as RadioShack due to the intense competition in the market.
On the positive side, RadioShack is seeing stable margins in its signature business and improving margins in the consumer electronics business. However, since the company derives a majority of revenues from the wireless segment, we expect margins to remain under pressure for the rest of our review period.
We will update our price estimate of $3.20 for RadioShack after the Q2 2013 earnings release.