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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
RadioShack (NYSE:RSH) Q3:12 results were well below expectations, due to weak Mobility sales compounded by significant margin erosion in Mobility. Revenue was $1.00 billion, compared with our estimate of $1.02 billion and the consensus estimate of $1.04 billion. Comparable-store sales were down 1.6%, compared with our estimate of flat and down 4.0% last year. EPS was $(0.33) excluding $0.14/share of severance and impairment charges, compared with our estimate of $(0.29), and the consensus estimate of $(0.16).
RadioShack results were below consensus even excluding charges and Target losses. Despite charges of $0.14 taken in Q3 for impairment (related to the Target Mobile centers) and severance pay (for 150 corporate employee cuts including former CEO Jim Gooch), earnings of $(0.33) were still well below consensus of $(0.16). Even if we were to assume that losses from Target Mobile centers ($13.7 million in Q3) are eliminated through a better deal or by closing the kiosks, RSH would have lost $(0.26) per share, well below consensus estimates. Should RadioShack shed its unprofitable Target Mobile business or somehow manage to break even on the kiosks, we do not see a path to profitability.
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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 smart phone or post-paid plan pricing. While it is clear that management is hopeful it can sell accessories at a higher attach rate, we think recent problems are traffic driven, and expect traffic to continue to deteriorate. Should RadioShack attempt to charge higher prices, we expect competition to lead to substantial sales declines, given the proliferation of smart phone vendors.
We maintain our FY:12 revenue estimate of $4.3 billion, but are decreasing our EPS estimate to $(0.62) from $(0.50) to reflect continued margin erosion and increasing costs driven by its rebranding initiative and international store expansion. We are decreasing our FY:13 revenue estimate to $4.1 billion from $4.2 billion, and our EPS estimate to $(0.52) from $(0.20).
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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