RadioShack Upgraded to Neutral

We are upgrading our recommendation on RadioShack Corp. (RSH - Analyst Report) to Neutral backed by its extremely low level of current valuation, which plunged more than 82% in the last year. In our view, the company is currently fairly valued and provides limited chance for further downslide of its stock price.

Meanwhile, the nightmare of Radioshack persists as it continues with its disappointing performance. Third-quarter 2012 financial results were well below the Zacks Consensus Estimates. 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.

RadioShack’s core consumer electronics retail business is on a secular downtrend. Consumers increasingly prefer online purchasing to visiting retail stores. Loss of foot traffic has severe negative impact on RadioShack’s business. Earlier, management suspended dividend payment in order to reduce the company’s debt burden.

A major near-term concern for RadioShack is the significant decline in its gross margin. In the third quarter of 2012, gross margin was 36% compared with 42.8% in the prior-year quarter. This was mainly due to an unfavorable sales mix toward lower margin smartphones and other mobile devices coupled with a higher percentage of mobility sales due to expansion of kiosks within Target Corp. (TGT - Analyst Report) stores.

Importantly, RadioShack announced that this trend will continue in the near future due to revamping of the core retail electronics segment and deployment of wireless kiosks inside Target stores. We believe RadioShack lost its market leadership as a high-margin device retailer and is eventually turning out to be a low-cost low-margin device supplier.