We reiterate our Underperform recommendation on RadioShack Corp. (RSH) based on our view that the company’s performance may suffer in 2011 due to several reasons. Fourth quarter of 2010 net income fell below the Zacks Consensus Estimate. Transition of Kiosks businesses from Sam’s Club to Target Corp. (TGT) stores will result in huge loss of operating profits. Management declared that pressure on gross margin will continue in the near-future since the company is revamping its core electronics accessories segment and making Kiosks to transition.
Precipitous fall in demand for the non-wireless category products remain a serious concern for the company. RadioShack is facing increasing competitive pressure from other large retail stores, online shopping stores, and some mobile carriers, which directly sales handsets to customers. Increasing competitive threats from several fronts may result in lower wireless sales going forward.
A major near-term concern for RadioShack is the significant decline of its gross margin. In the fourth quarter of 2010, gross margin was 41% compared with 43.9% in the prior-year quarter and 45.4% in the previous quarter. RadioShack announced that its operating income from the Kiosks segment will decline by $10 million – $15 million in 2011 due to closure of wireless kiosks at Wal-Mart’s Sam’s Club locations. At present, Target stores Kiosks generates an EBIT margin of just 4% compared with 12% of the Sam’s Club Kiosks.
Although RadioShack’s wireless businesses performed exceptionally well, serious concerns remained regarding its future agreement with Verizon Wireless (VZ). Unlike other three major wireless carriers in the U.S., RadioShack is yet to reach any agreement to sell Verizon products at its stores. Currently, RadioShack is selling Verizon phones through its Kiosks in Sam’s Club and Target stores. Winding down of Sam’s Club stores may negatively affect revenue of Verizon phones.
Most importantly, Verizon started selling legendary iPhone 4 of Apple Inc. (AAPL) from February 2011. This ends Apple’s exclusivity with AT&T (T) and as a result RadioShacks revenue from AT&T activated iPhone 4 may significantly suffer.
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