Yesterday, in a major strategic move, electronics retailer RadioShack Corp. and Target Corp. (TGT - Free Report) agreed to dissolve their existing business relationship. Earlier, in 2010, RadioShack entered into an agreement with Target to roll out Kiosks for wireless products in 1,500 discount stores of the latter. The project was completed in mid-2012.
However, ever since its inception, the deal has been unprofitable for RadioShack. The primary reason behind this is that RadioShack was managing only postpaid mobile business of Target, which is a low-margin one. The company has no access to high-margin prepaid mobile business or highly lucrative phone accessories business of Target. Accessories have higher profit margin than any devices.
Since October 2012, RadioShack was trying hard to renegotiate the terms of the partnership so that both the companies can earn profit. However, the two entities failed to reach any agreement. According to management the agreement will come to an end on April 8, 2013.
We believe that termination of the Target deal is a blessing for RadioShack. The company is facing bottom-line pressure for its lucrative wireless platform. In the third quarter of 2012, the company suffered a $47.1 million net loss.Moreover, RadioShack delivered weak bottom-line results due to costs associated with transition from an adverse product mix toward low-margin smartphones. The company currently has a long-term Neutral recommendation and short-term Zacks Rank #2 (Buy) on its stock.
RadioShack has undertaken a global expansion strategy. In April 2012, RadioShack announced a franchise deal with the Malaysian conglomerate, Berjaya. Berjaya expects to open 1,000 stores over the next 10 years in several South-East Asian countries including Vietnam, Malaysia and Thailand.
In a bid to tap the growing Asian market, RadioShack has entered into an agreement with Asian retailer Cybermart to open small retail outlets in China, Taiwan, Hong Kong and Macau. The first outlet was opened in Shanghai. Both RadioShack and Cybermart have a respective 49% and 51% stake in the project and also invested $2.94 million and $3.06 million respectively. They also plan to open at least 1,000 stores in the growing Southeast Asian markets with a further capital infusion of $34 million in the next three years.