Earning Scorecard: RadioShack

RadioShack Corp. (RSH) reported dismal fourth quarter 2010 financial results, where the EPS was below the Zacks Consensus Estimate.

Despite revenue growth, the company experienced a drop in gross margin compared with last year. Increased Selling, General and Administrative expenses coupled with higher promotional expenses affected the company’s upside potential.

Fourth Quarter Highlights

GAAP net income, in the fourth quarter of 2010, was $57 million or 51 cents per share compared with a net income of $75.7 million or 60 cents per share in the year-ago quarter. Quarterly EPS of 51 cents were below the Zacks Consensus Estimate of 53 cents.

Quarterly net revenue was $1,367.8 million, up 3.8% year over year and was almost in line with the Zacks Consensus Estimate of $1,369 million. The year-over-year increase in revenue was driven by the kiosk sales.

Furthermore, continued growth in the postpaid wireless segment, along with the improvement of prepaid wireless handsets, laptops, and wireless accessories sales aided revenue growth in the quarter.

Quarterly gross profit was $561.1 million compared with $579 million in the prior-year quarter. Gross margin was 41% in the reported quarter compared with 43.9% in the year-earlier quarter. This was mainly due to the weak results in the company’s T-Mobile business, adverse sales mix toward low-margin products and higher promotional and clearance relating to seasonal sells.

Agreements of Analysts

Of the 16 analysts covering the stock in last 7 days, 10 analysts downwardly revised their estimates for the first quarter of fiscal 2011, while only 1 analyst revised its estimate upward for the same period. Similarly, for the second quarter of fiscal 2011, out of the 15 analysts, 8 analysts decreased their estimates, while 2 analysts revised their estimates upward.

For fiscal 2011, out of the 18 analysts, 9 reduced their estimates, while 2 of the analysts raised their estimates. For fiscal 2012, out of the 14 analysts, 4 revised their estimates downward, while 2 moved in the opposite direction.

We believe this pessimistic sentiment was mainly driven by the drop in gross margin during the quarter, weak results in the company’s T-Mobile business and higher promotional and clearance relating to seasonal sells.

Currently, the Zacks Consensus EPS Estimate for the first quarter of fiscal 2011 is pegged at 37 cents. The projected negative annual growth is 5.13%. Similarly, for the second quarter 2011, the current Zacks Consensus EPS Estimate of 40 cents indicates a loss of 1.79% year over year.

Magnitude of Estimate Revisions

With respect to the downward revision of estimates, the Zacks Consensus Estimate is pegged at 37 cents, down by 1 cent, during the last 7 days, for the first quarter 2011. Similarly, for the second quarter of fiscal 2011, the Zacks Consensus Estimate decreased by 3 cents from 43 cents to 40 cents for the same period.

For fiscal 2011, the Zacks Consensus Estimate decreased 6 cents from $1.80 to $1.74, in the last 7 days. Likewise, for fiscal 2012, the Zacks Consensus Estimate declined 6 cents, from $1.95 to $1.89.

Earning Surprises

With respect to earnings surprises, the company had a mixed result in the last four quarters, reflecting positive surprises in the two quarters, meeting the expectation in one quarter and falling below the expectation in the last quarter. RadioShack produced an earnings surprise of 2 cents or 6.25% in the last quarter.

There is a downside potential (essentially a proxy for future earning surprises) of 3.77% for the ongoing quarter while no surprises expected in the upcoming quarter. For fiscal 2011 and 2012, the Zacks Consensus Estimates upside potentials are 0.57% and 1.59%, respectively.

Our Recommendation

RadioShack is facing increasing competitive pressure from other large retail stores like Walmart (WMT), online shopping stores and other mobile carriers like Verizon (VZ), which directly sales handsets to customers. Recently, Verizon added iPhone to its portfolio, which will put further pressure on RadioShack.

Increasing competitive threat from several fronts may result in lower wireless sales going forward. Precipitous fall in demand for the non-wireless category products, along with continuous decline in gross profit margin remain serious concerns for the company.

We, thus, maintain our long-term Underperform recommendation for RadioShack. Currently, RadioShack has a Zacks #5 Rank, implying a short-term Strong Sell rating on the stock.

RADIOSHACK CORP (RSH): Free Stock Analysis Report

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