The nightmare of RadioShack Corp. (RSH) persists as the company continues its disappointing performance. 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 financials.
Nevertheless, a silver lining for the company is its recent deal with Verizon Wireless, which is a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group plc. (VOD). We believe this agreement may become a major long-term positive for RadioShack. Verizon is the largest wireless operator in the U.S. An agreement with Verizon signifies access to much bigger consumer basket and the ability to sell premium mobile handsets. Successful execution of Verizon business will improve both the top line and bottom line of the company. We, therefore reaffirm our Neutral recommendation.
A major near-term concern for RadioShack is the significant decline of its gross margin. In the second quarter of 2011, gross margin was 45.9% compared with 47.5% in the prior-year quarter.This was mainly due to the weak result of the company's T-Mobile business, adverse sales-mix toward low-margin products and higher promotional and clearance related to seasonal sales.Importantly, RadioShack announced that this trend will continue in the near future due to revamping of the core retail electronics segment and deployment of wireless kiosks inside Target stores.
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 from Standard & Poor’s. Unemployment rate is high, which 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 CORP (RSH): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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