Earnings Preview: RadioShack Corp

RadioShack Corp. (RSH - Analyst Report) is slated to release its second quarter 2012 results on July 25, before the market opens. The current Zacks Consensus Estimate for the second quarter is pegged at 3 cents, representing an annualized decline of 88.75%.

With respect to earnings surprises over the trailing four quarters, RadioShack has met the Zacks Consensus Estimate only once, with an average earnings surprise of negative 113.13%.

First Quarter Highlights

Quarterly net revenue was $1,008.3 million, down 0.9% year over year and missed the Zacks Consensus Estimate of $1,065 million. The year-over-year downside in revenue was primarily attributable to the decline in sales from the U.S. RadioShack company-operated stores.

GAAP net loss from continuing operations in the first quarter of 2012 was $8.0 million or a loss of 8 cents per share compared with a net income of $31.4 million or 30 cents per share in the year-ago quarter. However, quarterly adjusted (excluding one-time items) EPS of a loss of 8 cents was nowhere near the Zacks Consensus Estimate of an income of 5 cents.

Gross margin was 39.1% in the reported quarter compared with 44.7% in the prior-year quarter. Comparable store sales for company-operated stores and kiosks (stores and kiosks opened at least a year) declined 4.2% year over year. This is a key retail performance indicator measuring growth from existing sales locations.

Agreement of Estimate Revisions

In the last 30 days, none of the 16 analysts covering the stock, increased the estimates for the second quarter of 2012, while one analyst revised it downwards. Similarly, for the third quarter of fiscal 2012, out of the 15 analysts covering the stock, none of the analysts changed their EPS estimates, over the last 30 days.

For fiscal 2012, in the last 30 days, out of the 16 analysts covering the stock, none of the analysts increased the EPS estimates while one analyst slashed it. Likewise, for fiscal 2013, out of the 15 analysts covering the stock, none of the analysts increased the estimate while one moved in the opposite direction.

We believe that most of the analysts prefer to remain on the sidelines as the company has entered into an agreement with Verizon Communications Inc. (VZ - Analyst Report), the largest wireless operator in the U.S, to provide Verizon’s postpaid and prepaid wireless products and services in its company-operated stores. Owing to the continuous fall in its core consumer electronics business, the analysts hold an extremely cautious outlook.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate has changed from 4 cents to 3 cents for the second quarter of 2012, while for the next quarter it was in line with the current Zacks Consensus Estimate of 8 cents. Likewise, for fiscal 2012 and 2013, the Zacks Consensus Estimate has plummeted by a penny to 30 and 38 cents, respectively.

Earnings Surprises

In the previous quarter, RadioShack reported EPS of a loss of 8 cents, which was far below the Zacks Consensus Estimate of an earning of 5 cents. The current Zacks Consensus Estimate for the ongoing quarter contains a 33.33% upside potential (essentially a proxy for future earning surprises) while the current Zacks Consensus Estimate for the third quarter remains flat at 0.00%. Similarly, for fiscal 2012 and 2013, the Zacks Consensus Estimate contains upside potentials of 56.67% and 60.53%, respectively.

Our Recommendation

Despite the termination of its contract with T-Mobile, we believe that the company’s recent agreement with Verizon Communication will deliver better results in the near future as Verizon is a much bigger company than T-Mobile. The company has re-launched its “The Shack” brand of retail store chain and is betting on wireless technology to improve its revenue going forward. Moreover, the company’s strategy to expand in Mexico and several South-East Asian countries will be accretive for its growth in future.

However, RadioShack continues to face cut throat competition from Wal-Mart Stores Inc. (WMT - Analyst Report) and Best Buy Co. Inc. (BBY - Analyst Report). Moreover, the decline in demand for non-wireless category products along with the continuous fall in gross profit margin based on unfavorable sales mix towards lower margin smartphones and other mobile devices remain serious concerns for the company.

We, thus, maintain our long-term Neutral recommendation for RadioShack. Currently, RadioShack has a Zacks #4 Rank, implying a short-term Sell rating on the stock.