Yesterday, RadioShack Corp. (RSH) suffered a setback as Standard & Poor’s Ratings Services (S&P) downgraded the company’s credit rating by one notch. S&P downgraded the corporate credit rating of RadioShack from BB to BB-. This rating assignment is in the junk territory of S&P and three notches below the rating agency’s investment grade territory. The primary reason of this downgrade, as explained by S&P, is its expectation that weak operating performance of RadioShack will continue in 2012.
The nightmare of RadioShack persists as the company continues its disappointing performance. The company’s results fell below the Zacks Consensus Estimates in the third quarter of 2011. Precipitous decline of the core consumer electronics retail businesses, adverse product-mix toward low-margin devices, and a volatile macro-economic scenario in the U.S. are taking toll on the company’s financial condition.
According to S&P, the lucrative wireless division of RadioShack, which accounted for half of its total revenue, will witness a flat to modest sales growth in 2012. As a result, margin pressure will continue. In the previous quarter, gross margin was 42.9% compared with 45.2% in the prior-year quarter. In the previous quarter, net earnings declined an enormous 99% due to costs associated with the transition of its offerings of Verizon Wireless mobile devices. Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group plc. (VOD).
The prolonged macro-economic fluctuations in the U.S. may turn out to be the biggest threat for the consumer electronics retail industry. The U.S. is currently suffering from sovereign debt crisis and lost its century old coveted AAA credit rating of Standard & Poor’s. Besides, low employment rate has resulted in lower disposable income for households. As a result, the retail sector may witness continuous slump. This volatile economic condition will certainly affect RadioShack.
RadioShack is facing intense competition from larger rivals like Best Buy Co. Inc. (BBY) and Wal-Mart Stores Inc. (WMT). Best Buy is gradually rolling out small format mobile stores. On the other hand, Wal-Mart tied up with TracFone for a low-price pre-paid wireless service and also raised its mobile phone sales activities. RadioShack is also facing stiff competition from online retailer Amazon.com Inc. (AMZN).
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