RadioShack Earnings Preview: When Will The Company Address Under-Performing Assets?

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

RadioShack (NYSE:RSH) will report its Q2:12 (June) results before market open on Wednesday, July 25, and host a call at 6:00am PT (dial-in: 866-383-8119, passcode: RadioShack, webcast: ir.radioshackcorporation.com).

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We expect Q2 revenue in line with our estimate, showing some growth over last year; however,  we expect little to flow through to the bottom line as margin deterioration persists. We expect Q2 revenue of $962 million and EPS of $0.11, compared to consensus for revenue of $972 million and EPS of $0.04. The company did not provide specific guidance, but expects a net income decline in 2012. Consensus EPS has declined dramatically since Q1 earnings, as the Q1 miss suggests substantial margin deterioration could continue throughout 2012. We believe it is likely that RadioShack will again miss our EPS estimates.

Our Q1 revenue estimate assumes comps of up 3%, but we expect EPS to decline 65% y-o-y or more. RadioShack expects its low-price guarantee program for mobile phones to increase foot traffic, but put additional pressure on margins. We are skeptical that RadioShack can drive foot traffic without significantly promoting, and think its program will yield unspectacular results.  We expect margins to narrow y-o-y due to a mix shift towards lower-margin smartphones and mobile devices. Also, the Target expansion has led to a higher percentage of mobility sales in the overall revenue mix, impacting margins further.

The company may be revisiting its core branding idea of ubiquity. We strongly believe that the company needs to begin rationalizing its total footprint, and believe that it should be closing under-performing domestic stores as it grows its Target Mobile centers and Mexican store base, particularly as it begins opening new stores in Southeast Asia this summer.

As RadioShack’s core business declines, it faces increasing competition from Best Buy (NYSE:BBY), limiting its opportunity for long-term revenue or earnings growth. We believe that the selection and quality of RadioShack’s non-mobile items continues to decline, as has its image. We think that RadioShack is now viewed by many as the retailer of choice for low-cost devices, while competitor Best Buy remains the preferred destination for the high-profile and high-margin devices.

Maintaining our NEUTRAL rating and 12-month price target of $4.50. Our price target reflects a 10x forward multiple of our 2013 EPS estimate of $0.45, in line with its average historical multiple, due to declining profitability and core weakness, partially offset by international expansion.

Michael Pachter is an analyst at Wedbush Securities.

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