Slipping Sales, Rising Profits at RadioShack

The shares gained Monday after the retailer announced higher quarterly earnings amid cost-cutting moves

RadioShack (RSH) has managed to boost profits recently with steps like closing stores and pushing to sell products like MP3 players. But after that quick fix approach, the consumer electronics retailer announced Apr. 30 that its same-store sales slid further during recent months even as profits surged. Still, investors liked the profit improvement, sending the stock sharply higher Apr. 30.

The Fort Worth company had net income of $42.5 million during the quarter ended March 31, up sharply from $8.4 million during the same period last year. "While we recognize and are focused on our top-line sales challenges, particularly in the wireless business, we will continue to bring a disciplined approach to the management of our business, with the goals of improving profitability," CFO Jim Gooch said in a press release Apr. 30.

RadioShack has met its profitability goal. Excluding items such as costs related to employee lay-offs countered by a federal telecommunications excise tax-related benefit, RadioShack earned 29 cents per share during the March quarter compared to 10 cents per share during the same period last year. Including such items the company reported 31 cents per share during the March quarter, while analysts surveyed by Thomson Financial were expecting only 14 cents per share.

Some of the problems the company faces are not entirely in its control. Founded in 1967, RadioShack has pinned its growth prospects on technology cycles, such as the personal-computer boom in the 1980s. But RadioShack's jump on the latest wave of cellular phones has started to backfire as the industry matures in recent years, making customers harder to find. Meanwhile cellular providers such as Verizon Communications (VZ) have opened up retail outlets of their own, adding competitive heat to RadioShack's struggle (see BusinessWeek.com, 10/25/06, "More Static for RadioShack").

RadioShack has tried to overcome such challenges by pushing sales of pre-paid wireless, MP3 players and accessories products instead. For example, the company began dedicating floor space to Apple's iPod in the second half of 2005, according to S&P.

Even so, RadioShack's revenue fell 14.5% year over year to $992 million during the March quarter, in sharp contrast with the consensus estimate for $1.04 billion. The company's sales at stores open more than a year languished by 9.2% year over year. "We took the opportunity earlier this year to warn that same store sales numbers for the first quarter were likely to be challenging, given the highly promotional nature of our business in the first quarter last year," CEO Julian C. Day said in a press release Apr. 30.

Besides the ongoing declines in its postpaid wireless business, RadioShack's recent cost-cutting efforts gave it 506 fewer company-operated stores and kiosks compared to last year. Meanwhile the company must battle rivals such as Best Buy (BBY), Wal-Mart (WMT) and Circuit City Stores (CC) in an industry that has suffered bitter price wars during recent months.

"We remain concerned about RSH's longer-term outlook amid a weakening market position and business model," said Standard & Poor's Corp. analyst Michael Souers said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) But noting the company's improved profit, Souers raised his 2007 and 2008 earnings per share estimates to $1.38 and $1.48 from $1.10 and $1.32. His 12-month target price moved up by $2 to $23 per share. Despite those positive reactions, Souers reiterated a strong sell opinion on the stock.

Investors bid up RadioShack's stock by 9.5% to $30.34 per share in early trading on the New York Stock Exchange.