Markets & Finance

Gloomy Days for RadioShack


The electronics retailer may have cut ad spending and staff levels too deeply, says one Wall Street analyst

RadioShack's (RSH) ongoing cuts to its workforce and advertising costs are going to make it harder for the company to overcome ongoing declines in wireless trends and ultimately will squeeze its profit margins even tighter.

That's the view that Banc of America Securities took on July 13 when it downgraded the country's fifth largest electronics retailer to a sell from a neutral rating. The employee and advertising cuts will lead to disappointing comparable-store sales and lower profits for the foreseeable future, the investment bank said in a research note.

The downgrade helped push the stock 6.3% lower to $30.79 on July 13.

Reduced commissions and benefit packages are also hurting employee morale, industry sources and visits to stores suggest, the note said. With gross profits weakening, Banc of America trimmed its 2007 earnings estimate to $1.39 a share, cut its 2008 forecast to $1.50 a share and lowered its target price to $18.

The commission, benefit and workforce cuts are part of an aggressive cost-cutting program that RadioShack put into effect in the third quarter of 2006, after bringing Julian Day aboard as the new chairman and chief executive. The company has cut about 40% of its staff at its Fort Worth headquarters since Day's arrival in July, 2006, and also closed more than 500 underperforming stores last year. It has said it expects to save $30 million a year from the latest round of headcount cuts announced earlier this year.

The company's earnings in the second quarter will probably exceed the Wall Street consensus estimate of 24 cents a share, due to some better margins and continued cost-cutting, but it's likely to be the last time results will beat analysts' forecasts for the foreseeable future, said Rick Weinhart, an analyst at BMO Capital Markets. He predicted same-store sales would drop by 6% to 7% from the June quarter of 2006.

Same-store sales are likely to be 5% lower for the full year but the decline could be larger based on recent consumer data and the fact that RadioShack isn't offering Apple Inc.'s (AAPL) new iPhone, he said. His forecast for 2007 earnings is $1.35 a share, with a fourth-quarter estjmate of 53 cents a share, versus the consensus view of 72 cents a share.

Even before being shut out of the iPhone market, RadioShack had already been losing significant market share in wireless products both to carriers and big box stores like Best Buy Inc. (BBY) and Circuit City Stores Inc. (CC).

The company's big problem is that it has relatively little fat left to trim after completing roughly 80% of its planned cost-cutting initiatives, Weinhart said.

RadioShack needed to slash costs just to keep pace with falling sales, but most of the cost reductions to date have centered on brand-building efforts that might have expanded the customer base. Any new cuts from now will probably eat into advertising that drives store traffic and promotional events, and that's sure to hurt sales going forward, says Weinhart, who has rated the stock underperform since last year.

What RadioShack appears to be missing is any sense of a longer-term strategy toward bringing in new merchandise and finding ways to generate higher margins, he said.

"The big question investors have, especially if they're leery about the restructuring, is 'What are you going to do to make RadioShack a more relevant retail destination these days,' and that's not an easy answer," he says.

The company's strength as a convenience store destination in urban areas has been challenged in recent years by carriers, which have dealt a dramatic blow to the wireless business by opening more of their own stores. Additional pressure has come from Best Buy's opening new stores in urban areas.

Having gone through numerous boom-bust cycles, the retailer is sorely in need of a new hot product now that wireless and satellite radio on on the decline, Weinhart says. The GPS navigation device for cars has done very well for the company, but the market isn't large enough to offset slowing sales in other categories, he added.

Weinhart doesn't own RadioShack stock and BMO Capital Markets doesn't do investment banking with the company.

Bogoslaw is a reporter for BusinessWeek's Investing channel.

American Apparel's Future
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

Sponsored Financial Commentaries

Sponsored Links

Buy a link now!

 
blog comments powered by Disqus