Is RadioShack Spending More Than It Can?

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

RadioShack (NYSE:RSH) will report Q1:13 (March) results before markets open on Tuesday, April 23, and host a call at 6:00am PT (dial-in (866) 713-8563, Passcode: RadioShack, webcast:

We expect Q1 revenue and EPS in line with our below-consensus estimates. We expect Q1 revenue of $926 million and EPS of $(0.15), compared to consensus for revenue of $964 million and EPS of $(0.11). The company did not provide specific guidance, but expects 1H to be challenging, specifically citing continuing slowness in the post-paid mobile business impacting Q1:13 results.

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RadioShack and Target (NYSE:TGT) will terminate their Target Mobile partnership in April. RadioShack operates 1,522 Target Mobile centers, and was scheduled to begin closing the unprofitable centers on April 8, 2013. We expect some gross margin recovery, but lower sales levels may trigger de-leverage of corporate overhead.

We expect significant losses to continue in 2013. We are pessimistic that RadioShack can reverse its deteriorating mobility margins, as the company clearly has no control over smartphone or post-paid plan pricing. We think RadioShack’s problems are traffic driven, and expect traffic to continue to deteriorate. Declining traffic should, in turn, lead to continuing comp declines…

RadioShack’s international expansion plans include expanding its store base in Mexico, opening new stores in Asia, and its JV strategy in China. While we do not necessarily view international expansion as a negative for the longer term, we are concerned that spending on expansion may exacerbate quarterly losses, placing further pressure on liquidity until international operations become profitable.

RadioShack began offering discounts on newer phones from Samsung (SSNLF.PK) and Apple (NASDAQ:AAPL) in mid-March as the Galaxy S 4 was released. Discounting may have pressured mobility margins further at the end of the quarter.

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Initiating 2014 estimate for revenue of $3.68 billion compared to consensus of $3.82 billion, and for EPS of $(0.54) compared to consensus of $(0.26). We think consensus has given RadioShack too much credit for stemming market share losses, and we do not believe RadioShack is likely to turn things around in 2014.

Reiterating our UNDERPERFORM rating and 12-month price target of $1 as losses grow from declining CE sales, and continued margin erosion, compounded by an ill-advised strategy to invest in 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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