RadioShack Tunes in Profits By Trimming Costs

Electronics retailer RadioShack (NYSE:RSH) increased profit by 18%, but shares fell more than 6% in afternoon trading as sales figures were weaker than hoped. This continues to fall in line with the emerging theme of the second quarter earnings results: companies beat earnings estimates in spite of dwindling sales. However, most companies who have beaten EPS estimates in the manner RSH did ($.39 versus estimates of $.28), have been getting a boost instead of a drop in value. RadioShack has exceeded estimates in nine of the last ten quarters, even though sales have been on a steady decline since peaking in 2005. Sales were down 2.9% from last year, coming in at $965.7 million versus estimates of $978 million. RadioShack offset the declining sales by shuttering under-performing stores, and in so doing dropped selling, general and administrative costs by 10.6%.

Coming into the day, the stock had been on a pretty nice run following two analyst upgrades late last week. The stock rose 11% last week, much of the reason for that was RadioShack’s new partnership to provide T-Mobile cellular phones and service contracts at their stores. With this agreement, RadioShack is now a retailer for three of the four largest post paid cell phone services, with only Verizon (NYSE:VZ) as yet unavailable through RadioShack. Clearly, RadioShack is trying to emphasize their presence as a one stop shop for consumers seeking cell phones, and FBR Capital Markets analyst Stephen Chick believes that RSH is being taken seriously as a retailer of cell phones, an area which already claims 30% of RadioShack’s revenue.

Set-top converter boxes have been a key driver of sales, as the digital conversion has made them a necessity for many households. Sales of these accessories have totaled $120 million year to date, which was a bit of a disappointment as the deadline draws near, for comparison the company saw $200 million in sales last year. Figuring out how to drive sales going forward will be the biggest challenge to RadioShack. They are competing against Best Buy (NYSE:BBY) and increasingly Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT), as they make a strong push into electronics trying to pick up market share vacated by Circuit City. It appears RadioShack is trying to find its niche in cell phones, and they hope this will lead to sales growth because costs can only be trimmed so far.

At Ockham, we have RadioShack as slightly Undervalued at the current price levels following today’s decline. However, there are real concerns for a business like RadioShack which seems to be in a constant identity crisis. The big ticket electronics products like computers and flat panel televisions are overwhelmingly being sold by RadioShack competitors, while RadioShack takes the lower margin business of accessories and dealing cell phone contracts. When you compare RadioShack to itself in the past, the price does look just a little low, but we think it is a risky trade to buy a stock that is back peddling like RadioShack has over the years. They have continued to fall behind other electronics retailers in sales and are now left desperately grasping for the cell phone business.

RadioShack Tunes in Profits By Trimming Costs

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