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RadioShack Slips to Underperform

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We downgrade our recommendation on RadioShack Corp. to Underperform ahead of its second-quarter 2013 financial results. We do not find any immediate growth catalyst and consequently do not expect the company to achieve profitability anytime soon.

Why the Downgrade?

The nightmare of RadioShack persists as the company continues to perform disappointingly. This somber condition is mainly due to weakness in the company’s postpaid Wireless business. The company’s core Consumer Electronics retail business is on a secular downtrend.

Consumers now prefer purchasing online to visiting retail stores. Declining foot traffic has severely affected RadioShack’s business. Most of the consumers prefer tablets and smartphones, which are less profitable for the retail industry. Moreover, the retail industry has become more competitive. Management suspended its 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 first quarter of 2013, gross margin was 39.7% compared with 40.5% in the prior-year quarter. This was mainly due to an unfavorable sales mix of lower-margin smartphones and other mobile devices.

In the first quarter of 2013, the comparable store sales for 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.

RadioShack is facing intense competition from larger rivals like Best Buy Co. Inc. (BBY - Free Report) and Wal-Mart Stores Inc. (WMT). Best Buy plans to open 600 to 800 mobile stores within 5 years, which in turn, will negatively impact RadioShack’s market share. These stores will mainly be located in shopping malls, where RadioShack traditionally operates.

Additionally, Wal-Mart intends to offer low-priced pre-paid wireless service. RadioShack is also facing stiff competition from online retailer, Inc. (AMZN - Free Report) .

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