DEEP ANALYSIS: Here’s Why RadioShack Got DOWNGRADED

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

Downgrading RadioShack (NYSE:RSH) to UNDERPERFORM from NEUTRAL and lowering our 12- month price target to $1.00 from $4.50 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.

Q2:12 results were well below expectations, due to weak Mobility sales compounded by significant margin erosion in Mobility. Revenue was $953 million, vs. our estimate of $962 million and consensus $972 million. Comparablestore sales for U.S. company-operated stores increased 0.1%, vs. our estimate of up 3.0%, and last year’s down 7.8%. EPS was $(0.21), vs. our estimate of $0.11, and the consensus estimate of $0.04.

It appears that Mobility has peaked. It appears that RadioShack (NYSE:RSH) traffic continues to decline, and we do not see this trend reversing, as its core products become increasingly commoditized and competition intensifies. We do not view mobile phones as a traffic driver, and believe that if consumers do not visit RadioShack for its core products, it will be unable to grow its Mobility and Signature product sales.

Margin deterioration will likely persist into Q3.  We expect further marginerosion in Q3 due to the mix shift towards lower-margin smartphones and mobile devices (with particular emphasis on the iPhone) in company-owned stores, compounded by the Target expansion due to its inability to sell high-margin accessories along with post-paid wireless phones. The company’s low price guarantee for mobile phones failed to drive sufficient incremental traffic to compensate for the additional margin pressure.

We are decreasing our FY:12 revenue estimate to $4.3 billion from $4.4 billion, and our EPS estimate to $(0.50) from $0.50 to reflect lack of growth for the  mobility segment impacted further by continued margin erosion, continued declines in its consumer electronics segment, and increasing costs driven by its rebranding initiative and international store expansion.We are decreasing our FY:13 revenue estimate to $4.2 billion from $4.4 billion, and our EPS estimate to $(0.20) from $0.45.

Michael Pachter is an analyst at Wedbush Securities.