Earnings Preview: RadioShack

RadioShack Corporation (RSH), one of the leading consumer electronics specialty retailers in the U.S., is slated to release its second quarter 2011 results on Monday, July 25, before the opening bell. The current Zacks Consensus Estimate for the second quarter is pegged at 38 cents per share, representing an annualized growth of negative 8.46%.

With respect to earnings surprises over the trailing four quarters, RadioShack has outperformed the Zacks Consensus Estimate in all the three quarters barring one quarter, where the reported EPS missed the Zacks Consensus Estimate by 2 cents. The average earnings surprise was positive 0.97%, which implies that the company has outdone the Zacks Consensus Estimate by the same magnitude over three of the trailing four quarters.

First Quarter Recap

On April 25, 2011, RadioShack reported its first quarter 2011 financial results. Quarterly net revenue was $1,063.3 million, up 2.1% year over year but missed the Zacks Consensus Estimate of $1,368 million. The year-over-year increase in revenue was attributable to 11% growth in mobility (mostly wireless) business, partially offset by lower sales of TV digital-to-analog converter boxes and related TV antennas, digital TV and digital music players.

GAAP net income in the first quarter of 2011 was $35.1 million or 33 cents per share compared with a net income of $50.1 million or 39 cents per share in the year-ago quarter. However, adjusted EPS in the reported quarter was 35 cents, exactly in line with the Zacks Consensus Estimate. Quarterly gross profit was $476 million compared with $491.9 million in the prior-year quarter. Gross margin stood at 44.8% in the reported quarter compared with 47.2% in the prior-year quarter.

Agreement of Estimate Revisions

In the last 30 days, 1 out of the 17 analysts covering the stock decreased the EPS estimate for the second and third quarter of 2011 while none increased their estimates for the same period.

For fiscal 2011, in the last 30 days, out of the 18 analysts covering the stock, 2 analysts decreased their EPS estimate while none moved upward. Likewise, for fiscal 2012, 2 out of the 19 analysts covering the stock, revised the EPS estimate downward while none moved in the opposite direction.

Magnitude of Estimate Revisions

During the last 30 days, for the second quarter of 2011, the current estimate was in line with the Zacks Consensus Estimates of 38 cents while for the third quarter of 2011, the current estimate was just a penny above the Zacks Consensus Estimates of 30 cents. Similarly, for fiscal 2011, the current estimate was 1 cent short of the Zacks Consensus Estimates of $1.67 while for 2012, the current estimate remained flat with the Zacks Consensus Estimates of $1.81.

Earnings Surprises

In the previous quarter, RadioShack reported EPS of 35 cents, which remained flat with the Zacks Consensus Estimate. The second and third quarter of 2011 contain a downside potential of 7.90% and 5.13%, respectively (essentially a proxy for future earnings surprises). Similarly, fiscal 2011 and 2012 reflect a negative earnings surprise of 0.60% and 0.55%, respectively.

Our Recommendation

Despite higher-margin product additions like iPad 2, PlayBook and Motorola XOOM tablets and the immensely popular iPhone4 coupled with roll out of kiosk and increased share repurchase plan, we hold a cautious outlook due to stiff competition from BestBuy Co. Inc. (BBY) and Wal-Mart Stores, Inc. (WMT). Moreover, we believe that a sequential decline in revenue and depleted earnings guidance for 2011 will remain headwinds for the company going forward.

We, thus, maintain our long-term Neutral recommendation for RadioShack Corporation. Currently, RadioShack Corporation has a Zacks#4 Rank, implying a short-term Sell rating on the stock.

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