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Recently, electronics and wireless handset retailer RadioShack Corp. ( RSH - Analyst Report ) suffered a setback as Standard & Poor’s Rating Services (S&P) downgraded the company’s overall creditworthiness. S&P downgraded RadioShack’s corporate credit and senior unsecured debt ratings to “B+” from “BB-“.
This rating assignment is in the junk territory of S&P and four notches below the rating agency’s investment grade territory. S&P further provided a Negative outlook for RadioShack.
The difficulties of RadioShack persists as the company continues with its disappointing performance. Precipitous decline of the signature and consumer electronics retail businesses, adverse product-mix toward low-margin devices, and a volatile macro-economic scenario in the U.S. are taking a toll on the company’s financials.
As per S&P, RadioShack will continue to face margin pressure throughout 2012 due to increased competition, and higher promotion expenses while offering larger discounts.
In the previous quarter, the company’s net income plunged 79% year over year. Gross margin was 34.8% in the previous quarter compared with 41% in the prior-year quarter. This was primarily attributable to an unfavorable sales mix toward lower margin smartphones and other mobile devices coupled with more promotional holiday season.
We believe the company will face weak bottom line in the near future due to costs associated with transition from T-Mobile to Verizon Wireless partnership. Verizon Wireless is a joint venture between Verizon Communications Inc. ( VZ - Analyst Report ) and Vodafone Group plc. ( VOD - Analyst Report ) .
The core retail businesses of RadioShack, namely Signature (including accessories, digital-to-analog TV converter boxes and related TV antennaspower, service, and technical products) platform and consumer electronics (including digital TVs, digital music players, and digital cameras) platform continue their free fall. In the previous quarter, revenue from these two segments inched down 1.1% and 29.7% year over year.
Importantly, core businesses have some material effect on the wireless business. Core business indirectly drives wireless sales through increased footfall. Most of the customers, who entered RadioShack stores intending to buy core products, were generally attracted toward its latest wireless offerings.
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