Analyst: RadioShack Losses Are Growing

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

Fourth-quarter results were significantly lower than our and consensus expectations. Revenue was $935 million compared with our estimate of $1.052 billion and consensus $1.120 billion. Comparable-store sales were down 19 percent compared with our estimate of down 5 percent and last year’s down 7 percent. Non-GAAP EPS was $1.29 (excluding a tax-adjusted $61.5 million impairment in onetime items) compared with our estimate of 17 cents and the consensus estimate of 14 cents.

RadioShack (NYSE:RSH) plans to close up to 1,100 stores over the next year, subject to lender consent. While details have not been finalized, the company is focused on closing underperforming stores in over-penetrated markets with the goal of shifting some of the traffic to fewer locations. The closings are expected to free up inventory for liquidation, with the proceeds in turn used to reset remaining stores.

Comparable-store sales were down a staggering 19 percent, driven by traffic declines, bad weather, a weak consumer electronics market, and soft performance in the mobility business. The postpaid business was below expectations from lower demand and an extremely promotional holiday season, driving mobility, down 23 percent. In our view, RadioShack’s core customers have gradually abandoned it in favor of other retail, and it will be hard to win them back.

RadioShack’s operational decisions are now being vetted by creditors. The company intends to close up to 1,100 stores this year, subject to the consent of its lenders. That last clause should send shivers down the spines of equity investors, as they are no longer relevant to management decisions — the creditors clearly are in control of the ship, and in our view, the ship is sinking.

We are decreasing our fiscal-year 2015 (January year-end) revenue estimate to $2.51 billion from $3.398 billion and are reducing our earnings per share estimate to $2.60 from $1.57 reflecting store closures and continued comps declines. Our estimates presume a rebound in gross margin and dramatic G&A cuts (neither likely to occur, in our view). The company did not provide quarterly or full-year guidance.

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 estimate of 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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