RadioShack takes a sharp dive
Changes at one mobile carrier hurt the electronics retailer in its fourth quarter.
RadioShack (RSH) shares fell nearly 8% Tuesday after the electronics retailer said fourth-quarter profit fell by 79%. As horrific as that number sounds, it's actually in line with expectations, as the company warned that a struggling mobile phone business weighed heavily on the bottom line.
Once the very definition of technology in America, RadioShack is now seen as a relic of a bygone age. However, many analysts considered its push into the cellphone industry a sound survival tactic. RadioShack still has a reputation for quality and good customer service -- strong attributes, one would think, for selling mobile phones.
But changes at one of its largest mobile partners, Sprint Nextel (S), have seriously cut into RadioShack's phone activations.
Sprint is raising the credit score bar for potential subscribers, analysts say, and the new standards will exclude some customers who previously would have been able to get a phone. There's also less room for profit now that Apple's (AAPL) iPhone is the star in Sprint's lineup. The iPhone offers a lower profit margin for retailers compared with that of comparable Android phones.
Other factors hurting results at RadioShack included discounting and low margins earned on smartphones.
The company reported a fourth-quarter profit of $11.9 million, or 12 cents a share, down from $57 million the previous year. Some analysts had expected 11 cents a share. Net sales rose 5.9% to $1.39 billion -- about what analysts had expected. The company had previously forecast a profit of 11 cents to 13 cents per share on $1.39 billion in revenue.
"Despite our gross margin challenges, we have a strong balance sheet, are making progress in our mobility business, and expect to advance our business improvement initiatives in 2012," Jim Gooch, RadioShack's CEO, said in a release.
Analysts at Wedbush kept a "neutral" rating on the stock and gave it an $8 price target. The stock plunged nearly 8% Tuesday to close at $7.26. The analysts said their price target reflects an 8-times forward multiple of their full-year earnings estimate of $1. That's well below even the low end of the stock's historical range of 10 to 18 times forward earnings, the analysts said, noting the chain's declining profitability, core weakness, and increasing competition.
There was some good news in the quarter, however. Same-store sales rose 2.2% on tablets and mobile phones with AT&T (T) and Verizon Wireless contracts -- in-line with RadioShack's forecast. Revenue was dragged down by declining sales of Sprint and T-Mobile handsets.
Gross margin took a dive to 34.8% from 41%, which RadioShack largely blamed on low-margin smartphones and other mobile devices accounting for a larger share of sales, in addition to increased holiday sales.
RadioShack shares are down 25% this year.
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