RadioShack Downgraded to Neutral

We downgrade our recommendation on RadioShack Corp. (RSH) to Neutral. Major near-term concern for RadioShack is the significant decline in its gross margin. In the third quarter of 2010, gross margin was 45.4% compared to 47.6% in the prior-year quarter and 47.5% in the previous quarter.

Management cited the precipitous decline of the electronics accessories business and an unfavorable product-bias towards low-margin mobile handsets as the primary reasons for this poor margin. Importantly, RadioShack announced that this trend will continue in the near future due to revamping of the core retail electronics segment and large-scale deployment of wireless kiosks inside Target Corp. (TGT) stores.

RadioShack is facing intensifying competition from larger rivals like Best Buy Co. Inc. (BBY) and Wal-Mart Stores Inc. (WMT). Best Buy is gradually rolling out small format mobile stores. These stores are mainly located in such shopping malls which are traditionally RadioShack territory. The company is expected to open 1,000 mobile locations by end -2010.

On the other hand, Wal-Mart has tied up with TracFone for a low-price pre-paid wireless service and also raised its mobile phone sales endeavors. RadioShack is also facing stiff competition from online retailer Inc. (AMZN).

Nevertheless, RadioShack is one of the most experienced and trusted consumer electronics specialty retailers in the U.S. We remain optimistic about the company’s large, profitable store base and its exposure to the wireless communications business.

After completing a pilot project, management has recently taken a strategic decision to roll out Kiosks for wireless products in a majority of 1,700 discount stores of Target Corp in mid-2011. This mobile service called “Bullseye Mobile” started rolling out from mid-August 2010.

RadioShack’s average ROE for trailing twelve month is 21.3%, significantly higher than the industry average of just 14.8%. We expect the company’s Return on Invested Capital and free cash flows to increase in the future quarters due to the massive boom in the wireless industry.

RadioShack has re-launched its “The Shack” brand of retail store chain and emphasizes wireless technology to stay aligned with future trends.

RADIOSHACK CORP (RSH): Free Stock Analysis Report

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3 Comments on RadioShack Downgraded to Neutral

  1. It is no wonder that Radio Shack is losing traction to mega stores like Wal-Mart and Best Buy. Radio Shack needs to pick up some of the better selling mobile plans, like Wal Mart partnering with TracFone to offer no contract, pay as you go mobile service. The coverage is great and it is the cheapest option out there when it comes to cell phone carriers.

  2. Please explain to me why radioshack and tracfone can’t also team up? It’s about time they start getting more competitive with their ‘low-end’ cellphone offerings. A little more competition wouldn’t do anybody any harm. Maybe a little more focus on the guys who don’t need a phone much…I’m sure there’s more of those guys out there than there are iphone toting fellas.

  3. The problem with “The Shack” is what is not seen. The corporate culture is a very old, “Good O’ll Boy” system. The individuals looking at the numbers have very little understanding of what the products they are selling do, or how the customers plan to use them. All they see are numbers and if the numbers don’t meet the projections they have planned for, then the problem is at the sales associate level. Rarely does the corporate hirachary ever admit they made a bad decission only the sales staff did not carry out the plan.

    Also the sales staff are paid to sell the high end phones. The sales associates are paid “Spiffs” for each phone sold. The pre-paid / no contract plans are not to be sold and therefore carry the lowest spiffs Even though they are displayed in the store, the sales associates are told to covert every prepaid customer to an ATT/Sprint/T-mobile customer as soon as possible. Anything less is considered a failure.

    Thats why the shack does not embrace the no contract market, they arn’t making as much $$ from it.

    I can remember going into a Radio Shack as a kid and finding all kings of cool stuff. Thats why I decided to work for them… After 5 years and seeing the company culture go from a “We care about you” to “What have you done for us lately” attitude. I couldn’t in good concience stay with them any longer.

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