RadioShack’s Q4’13 Earnings Preview: No Significant Benefit From The Turnaround Strategy Yet

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. The company saw its net loss widen to $112 million in Q3 2013 compared to $47 million in Q3 2012, as it works on a turnaround strategy to revive its business. In addition to lower sales volume, the inventory action taken during Q3 2013 lowered RadioShack’s gross profit by 7.8%.

RadioShack devised a new strategy earlier this year with an aim to turnaround its business. Though it claims to have made considerable progress in a number of areas, it believes that there is a lot of work to be done in addressing a great number of legacy operational issues. Thus, it does not expect any material benefit from its turnaround strategy for the next few quarters. RadioShack will release its Q4 2013 and year end earnings on March 4.

Our price estimate of $2.79 for RadioShack is almost in line with the current market price. We will update our valuation after the 2013 earnings release.

See our full analysis for RadioShack

Recent Steps Taken By RadioShack Can Help Re-accelerate Its Growth 2014 Onward

In Q1 2013, RadioShack announced its turnaround strategy, offering a broad overview of how it plans to tackle its present challenges. It claims to be making strong progress on repositioning its brand, revamping the product assortment and reinvigorating its stores. The company hopes to achieve higher operational efficiency and improve its financial flexibility in the future with these initiatives.

– Re-positioning its brand to connect with a younger audience: The main focus of RadioShack’s initiative is on re-branding the chain and re-defining what it stands for. The company is making efforts to tap into the younger demographic and the Do-It-Yourself (DIY) customer segment. RadioShack aims to connect with a more youthful audience through partnerships with key vendors and celebrities. It claims to have benefited from its partnership with DrDre in May 2013, to promote the Pill speaker from Beats by. It entered into another Beats promotion during the MTV Video Music Awards featuring tennis star Serena Williams and rap artist 2 Chainz. It subsequently launched co-branded commercials with several celebrities including Michael Phelps, Steve Aoki, Lil Jon and Alexis & Fido. RadioShack claims that these promotions are activating a new consumer base which will help drive its sales growth.

– Revamping product assortment: RadioShack is working towards removing duplicate inventory and unproductive inventory through promotions and clearance events. In Q3 2013, it reduced the number of stocked items in its stores from approximately 4,500 SKUs to 3,500. In addition to getting rid of old products, it is carrying fewer products in order to reduce clutter and enhance customer experience at its stores. Though revamping its portfolio increased RadioShack’s cost of goods sold in Q3 2013, the company believes that it was an important step to enable it to reset the product mix in time for the holiday season and is in line with its long term repositioning strategy.

– Reinvigorating its stores: RadioShack has been working towards converting its stores into a more relevant outlet for consumers. It opened its first concept store in July 2013, in an effort to make a big impact on the electronics shopping market and improve the Radio Shack customer experience by promoting an interactive experience in its stores. These concept stores offer interactive areas such as the speaker wall where shoppers are able to connect their mp3 players and other mobile media devices to experience technology. The company claims that these stores have exceeded its forecast and generated double-digit comparable store revenue since the conversion date. It planned to have over 100 concept and brand statement stores by the end of 2013.

Gross Margins Will Remain Stagnant

Radio Shack’s gross margins have declined from 45.4% in 2008 to 30.1% in Q3 2013. A higher proportion of low margin products in its portfolio, price competition from other players in the market, and high promotional and re-branding costs are the primary factors negatively impacting RadioShack’s bottom line. While the company’s turnaround efforts might help reignite its brand and re-accelerate growth, in turn positively impacting margins, we believe that RadioShack’s gross margins will remain stagnant for the rest of our review period due to the following factors –

– Higher sales of lower margin wireless products: RadioShack has been betting big on shifting its focus to mobility devices like smartphones and tablets, 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. 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.

– Competitive pressure can limit growth: The entry of online retail giants has altered the landscape for the consumer electronics market. Retailers like Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) are taking business away from pure-play consumer electronics stores by offering lucrative discounts. 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 sales of traditional brick-and-mortar retailers. Price competition from other established players can restrict Radio Shack’s top line growth and if the company does end up offering lower prices it will have to take a hit on its gross margins.

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