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RadioShack Remains Neutral

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We reaffirm our long-term Neutral recommendation on RadioShack Corp. . The company surprised in its fourth-quarter 2012 financial results with a net profit. This was in huge contrast to the Zacks Consensus Estimate of a net loss. However, the top line of RadioShack fell below the same.

Why Kept at Neutral?

We believe that an adverse product-mix toward low-margin devices and a volatile economic scenario in the U.S. are taking a toll on RadioShack’s revenues. The company’s legacy consumer electronics retail business is on a secular downtrend. Consumers now prefer purchasing online to visiting retail stores. Loss of foot traffic impacted RadioShack severely. Earlier, management suspended its dividend payment in order to reduce the company’s debt burden.

Nevertheless, termination of the Target Corp. (TGT - Free Report) contract may improve gross margin, going forward. Meanwhile, the stock price plunged 52% last year. In our view, the company is currently fairly valued. RadioShack carries a Zacks Rank #3 (Hold).

Risk/Reward Almost Balanced

In the previous quarter, revenues of the high-margin Signature business grew 2% year over year. This was the fifth consecutive quarter of positive sales growth for this platform. Signature sales increased primarily on higher sales of wireless accessories.

Since Sep 2011, RadioShack started offering both post-paid and prepaid products of Verizon Wireless in its 4,300 company-operated stores nationwide. Depending on Verizon Wireless, the company may expand its market share in the mobile phone business. Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ - Free Report) and Vodafone Group plc. (VOD - Free Report) .

On the other hand, in the previous quarter, 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 7% year over year. This is a key retail performance indicator measuring growth from the existing sales locations. The core retail businesses of RadioShack, namely, consumer electronics platform continues its free fall.

Importantly, core businesses have some material effect on the wireless business. Core business indirectly drives wireless sales through increased foot traffic. Most of the customers who entered RadioShack stores intending to buy core products were attracted toward its latest wireless offerings.  

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