We downgrade our recommendation for RadioShack Corp. (RSH) to Neutral, due to our concern regarding future sales potential of the company’s non-wireless product categories. RadioShack’s fourth quarter 2009 financial results were mostly in line with the Zacks Consensus Estimates. But that was mainly due to significant growth of the wireless businesses.
In the fourth quarter, sales of its TV Converter box was just $13.1 million compared to $54.4 million in the year-ago quarter. Accessory sales were down 19.6% due to a huge sales decline in digital-to-analog TV converter boxes, imaging accessories and video game accessories.
Modern Homes sales declined 8.8%, Personal Electronics sales decline 12.4%, Power sales declined 11.2%, and Technical sales declined 4%. Kiosks segment revenue declined 15.3% year-over-year to $67.2 million. This was primarily due to fewer kiosk locations and the closure of Sprint-branded kiosks in August 2009.
We believe RadioShack may face serious challenges from more diversified stores like Best Buy Co. Inc. (BBY) and Wal-Mart Stores Inc. (WMT) unless it revamps its non-wireless segment. The non-wireless segment has underperformed for the second quarter in a row.
Nevertheless, the wireless category, which represents one-third of total sales, is likely to continue its impressive performance in the near future. RadioShack generated increased revenue from Sprint Nextel Corp. (S) postpaid wireless business. The introduction of T-Mobile, a division of Deutsch Telekom AG (DT) in company operated stores and Verizon Wireless (VZ) in Sam’s Club Kiosks enhanced RadioShack’s mobility proposition. The company now offers a broad range of products from AT&T (T), Sprint Nextel, T-Mobile and Verizon Wireless.
RadioShack has also started selling Apple Inc’s (AAPL) 3G iPhones in some of its stores and decided to sell 3G iPhones nationwide in 2010. In addition, RadioShack has taken a strategic move to manage wireless kiosks in Target Corp. (TGT) stores that may further boost revenue in 2010.
We thus provide a Neutral recommendation for RadioShack, which means the stock will perform mostly in line with the broader market.
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