RadioShack Corp.(RSH) is slated to release its third quarter 2011 results on October 25, after the closing bell. The current Zacks Consensus Estimate for the third quarter is pegged at 36 cents, representing an annualized negative growth of 1.86%.
With respect to earnings surprises over the trailing four quarters, only once RadioShack surpassed the Zacks Consensus Estimate with an average earnings surprise of negative 6.37%.
Second Quarter Highlights
Quarterly net revenue was $941.9 million, down 2.1% year over year and significantly lower than the Zacks Consensus Estimate of $1,034 million. The year-over-year downside in revenue was primarily attributable to the decline in Sprint Nextel Corp. (S) and T-mobile wireless sales coupled with lower sales of digital-to-analog TV converter boxes and related TV antennas, digital cameras, and digital music players.
GAAP net income from continuing operations in the reported quarter was $23.5 million or 23 cents per share compared with a net income of $49.5 million or 39 cents per share in the year-ago quarter. However, quarterly adjusted (excluding one-time items) EPS of 30 cents was well below the Zacks Consensus Estimate of 38 cents.
Gross margin was 45.9% in the reported quarter compared with 47.5% in the prior-year quarter. Comparable store sales for company-operated stores and kiosks (stores and kiosks opened at least a year) declined 7.8% year over year. This is a key retail performance indicator measuring growth from existing sales locations.
Agreement of Estimate Revisions
In the last 30 days, out of the 16 analysts covering the stock, none increased the EPS estimates for the third quarter of 2011, while four analysts decreased their estimates. Similarly, for the fourth quarter of fiscal 2011, out of the 16 analysts covering the stock, two analysts increased their EPS estimates, while one decreased its estimate over the last 30 days.
For fiscal 2011, in the last 30 days, out of the 14 analysts covering the stock, none of the analysts increased the EPS estimates but two analysts slashed their estimates. Likewise, for fiscal 2012, out of the 18 analysts covering the stock, one analyst increased the EPS estimate but one analyst moved in the opposite direction.
We believe that most of the analysts prefer to remain on the sidelines as the company has entered into an agreement with Verizon Communications Inc. (VZ), the largest wireless operator in the U.S, to provide the latter’s postpaid and prepaid wireless products and services in its company-operated stores. Owing to the continuous fall in comparable store sales, the analysts hold an extremely cautious outlook.
Magnitude of Estimate Revisions
During the last 30 days, the Zacks Consensus Estimate was 2 cents above the current estimates of 36 cents for the third quarter of 2011, while for the next quarter it was in line with the current Zacks estimate of 57 cents. Likewise, for fiscal 2011, the Zacks Consensus Estimate moved up by 2 cents from the current estimate of $1.58, while for fiscal 2012, the Zacks Consensus Estimate was just a penny above the current estimates of $1.81.
Earning Surprises
In the previous quarter, RadioShack reported EPS of 30 cents, which was far below the Zacks Consensus Estimate of 38 cents. The current Zacks Consensus Estimates for the ongoing and fourth quarter contain 2.78% and 8.77% downside potentials (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate downside potentials are 2.53% and 2.76%, respectively.
Our Recommendation
Despite the termination of its contract with T-Mobile, we believe that the company’s recent agreement with Verizon will deliver better results in the near future as Verizon is a much bigger company than T-Mobile. Moreover, the inclusion of iPhone and tablets in their product portfolio will be accretive for the company going forward, as the demand for these products are increasing rapidly.
However, RadioShack continues to face cut throat competition from Wal-Mart Stores Inc. (WMT) and Best Buy Co. Inc. (BBY). Moreover, the decline in demand for non-wireless category products along with the continuous fall in gross profit margin remains serious concern for the company.
We, thus, maintain our long-term Neutral recommendation for RadioShack. Currently, RadioShack has a Zacks#3 Rank, implying a short-term Hold rating on the stock.
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