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RadioShack Remains Neutral

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We reaffirm our long-term Neutral recommendation on RadioShack Corp. . The company posted disappointing financial results for the first quarter of 2013. Both the top and the bottom lines fell significantly below the respective Zacks Consensus Estimates. Although, RadioShack is taking a series of measures to improve its wireless product segment, we believe it will take time and will affect the company’s overall earnings due to increased expenditure on marketing and promotion. RadioShack currently has a Zacks Rank #3 (Hold).

Why Kept at Neutral?

RadioShack’s consumer electronics retail business is on a secular downtrend. Consumers now prefer purchasing online to visiting retail stores. Loss of foot traffic has severe negative impact on RadioShack’s business. Management suspended its dividend payment in order to reduce the company’s debt burden.In the first quarter of 2013, the comparable store sales from the company-operated stores and kiosks (stores and kiosks that have been operational for at least a year) were down 5.7% year over year. This is a key retail performance indicator measuring growth from the existing sale locations.

Nevertheless, termination of the Target Corp. (TGT - Free Report) contract may improve gross margin, going forward. The Target deal failed to meet expectations because RadioShack was managing the low-margin postpaid mobile business of Target. The company has no access to the high-margin prepaid mobile business or the highly lucrative phone accessories business of Target.

Since Sep 2011, RadioShack has been offering both postpaid and prepaid products of Verizon Wireless in its 4,300 company-operated stores nationwide. We believe that this deal may turn out to be a huge positive for RadioShack. Verizon is the largest wireless operator in the U.S. The agreement with Verizon Wireless will enable RadioShack to access more premium phones. Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ - Free Report) and Vodafone Group plc. (VOD - Free Report) .

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