Sprint Corporation (S) recently announced that it will distribute its products through another 100 stores of Costco Wholesale Corporation (COST). The move will enable the company – which already offers products through 106 membership warehouses – to reach out to a wider customer base across the U.S.
Costco membership warehouses allow customers to purchase branded merchandise at discounted prices compared to retail stores. To date, Sprint has leveraged the opportunity to generate higher product sales through Costco membership warehouses and now expects the addition of stores to add to its popularity and drive business growth.
We believe the company’s need to increase distribution centers emerges from the increased penetration of smartphones including Android, tablets, USB modems, hotspots and routers, all of which are performing well in the market. Currently, Sprint enjoys a smartphone penetration of 86% of its post-paid sales. In Jun 2013, the company launched 4G LTE based Windows Phone 8 smartphones – HTC 8XT and Samsung ATIV S Neo under two-year contract plans.
Recently, the company also announced to offer Samsung Galaxy Mega on its network attracting customers for its 4G services. Besides, Sprint also activated over 1.4 million iPhones in the second quarter, 41% of which belong to new customers. Over the long term, the company expects iPhone to generate $7–$8 billion in profits with the addition of 1–1.2 billion gross subscribers adding $6–$6.8 billion in profitability.
Overall, the company sold around 5 million smartphones in the second quarter. In addition, the company also introduced its tri-band LTE data device that uses LTE on 800 megahertz, 1,900 megahertz and 2.5 gigahertz. The device will be available for sale in late 2013.
We believe that after Sprint’s merger with Japan’s telecom company, Softbank Corp., the company is diverting its focus on expanding business in the U.S. market so as to turn its loss making business into a profitable organization. As a result, strategic investment and collaboration remain crucial to the company’s future. While on the one hand the company is planning product sales, which we believe includes contract services bundled with sale of equipment like smartphones and tablets, on the other hand, it is reportedly scrapping the idea of participating in Canadian spectrum auction, in which Verizon Communications Inc. (VZ) is also bidding. This shows that Sprint’s primary focus is on scaling up its operations in the home ground rather than entering into a highly competitive market like Canada, which may turn out all the more aggressive with Verizon’s entry.
Beyond this, the company is banking its Network Vision strategy. Through this plan, the company is concentrating on the core Sprint platform, which includes CDMA, WiMAX and LTE technologies that led to the eventual termination of the Nextel platform (iDEN business) in Jun 2013. The company began the deployment of CDMA voice on 800 MHz in early 2013 and is expected to deploy LTE on 800 megahertz by this fourth quarter.
As part of the Network Vision strategy, the company’s LTE services currently cover over 151 markets with 20,000 sites on air. In 2013, the company expects to have LTE coverage for approximately 200 million customers. We believe the efficient use of capital, reduction of cell sites, elimination of dual networks, backhaul efficiencies, reduced churn, lower roaming charges and energy cost savings bode well for Sprint’s long-term growth. The company expects the Network Vision deployment to be over by the end of 2013, two years ahead of the original schedule.
Sprint Corp., which operates with CenturyLink, Inc. (CTL), currently has a Zacks Rank #3 (Hold).
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