RadioShack: Is It Doing Too Little, Too Late?

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

RadioShack (NYSE:RSH) Q1:13 results missed our below-consensus expectations, as comp declines and margin erosion continued and spending increased. Revenue was $849 million, compared with our estimate of $926 million and consensus $964 million. Comparable-store sales were down 5.7 percent, compared with our estimate of down 3.3 percent, and last year’s down 4.2 percent. Non-GAAP EPS was $(0.35) (excluding $0.08/share of losses from discontinued operations), compared with our estimate of $(0.15), and the consensus estimate of $(0.11). Once again, the company did not provide specific quarterly or full-year guidance.

New CEO Joseph Magnacca is taking the right steps, but it may be too late. We believe Mr. Magnacca has focused on the most logical path to return RadioShack to profitability; unfortunately, we think RadioShack hired him a decade too late. RadioShack will begin product development in July, and customers will start seeing new merchandise, including more innovative private label merchandise as well as more DIY categories that are intended to increase the non-mobility mix and increase store productivity.

Mr. Magnacca has also given the push for yet another marketing campaign to rebrand RadioShack, this time toward the younger consumer it lost several years ago. In our opinion, that consumer is never coming back. S/he is far too tech savvy with the ability to perform on-the-spot mobile comparison shopping to be drawn into a RadioShack store.

We expect significant losses to continue. RadioShack expects continued weakness throughout the first half of 2013. We are pessimistic that RadioShack can turn mobility margins around, as the company clearly has no control over smartphone or post-paid plan pricing. While management clearly hopes to sell more accessories and pre-paid phones, we think the company’s fundamental problems are traffic driven, and we expect traffic to continue to deteriorate…

We are decreasing our FY:13 revenue estimate to $3.8 billion from $3.9 billion, and our EPS estimate to $(0.78) from $(0.50) to reflect Q1 results and recast financials. We are decreasing our FY:14 revenue estimate to $3.6 billion from $3.7 billion, and are maintaining our EPS estimate of $(0.54) on cost cuts.

Reiterating our UNDERPERFORM rating and 12-month price target of $1 as losses grow from declining CE sales, and continued margin erosion, compounded by continued investments to spur growth. Our price target reflects our best guess at the brand equity and going-concern value for the business (around $300 million), net of the company’s net debt.

Michael Pachter is an analyst at Wedbush Securities.

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