Analyst: Despite Positive Quarter, RadioShack Turnaround Will Fail

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

Q2:13 was the first quarter of positive comps since 2010, with upside driven by promotional activity that led to a continuation of margin erosion. Revenue was $845 million, compared with our estimate of $834 million and consensus $815 million. Same-store sales were up 1.3 percent, compared with our estimate of down 5.0 percent, and last year’s down 2.6 percent. Non-GAAP EPS was $(0.53), compared with our estimate of $(0.16), and the consensus estimate of $(0.23). Once again, the company did not provide specific quarterly or full-year guidance.

RadioShack (NYSE:RSH) hired AlixPartners, an advisory firm focused on turnarounds and Peter J. Solomon, an investment bank, to assess its financial options. We expect the company’s liquidity to steadily erode, and RadioShack may have difficulty getting through two holiday seasons without a balance sheet restructuring.

We expect significant losses to continue, and do not expect the company’s turnaround to be successful. Management clearly hopes that higher-margin products and a store refresh will attract new customers and improve margins. We think RadioShack’s problems are traffic-driven, and expect traffic declines to continue, even as it invests in new programs, inventory and promotions.

RadioShack recently implemented several initiatives to boost the company’s image and store traffic. These include a partnership with Beats By Dre, new display areas in-store dedicated to wearable digital fitness technology, a new do-ityourself product line in partnership with Maker Media, and a five-year agreement with NACSCORP to offer consumer electronics and accessories to nearly 4,000 college stores. In July, RadioShack opened its first concept store in Manhattan and opened its first college location at University of Texas at Austin. While these steps are promising, the company may run out of time before traffic improves.

We are increasing our FY:13 revenue estimate to $3.780 billion from $3.775 billion, and reducing our EPS estimate to $(1.04) from $(0.69) to reflect Q2 results, a lower store base, and debt pay down. We are increasing our FY:14 revenue estimate to $3.612 billion from $3.609 billion, and are increasing our EPS estimate to $(0.50) from $(0.54), reflecting lower interest expense.

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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