Yesterday after market close, RadioShack Corp. (RSH) posted its fourth quarter 2010 financial results, which was below the Zacks Consensus Estimates. In the after-market trade in NYSE, stock price of RSH was down 16 cents (1.05%) to $15.15.

However, comparable store sales for the company-operated stores and kiosks (stores and kiosks opened at least a year) grew 1.3% year over year. This is a key retail performance indicator measuring growth from existing sales locations.

GAAP net income, in the fourth quarter of 2010, was $57 million or 51 cents per share compared with a net income of $75.7 million or 60 cents per share in the year-ago quarter. Quarterly earnings per share (EPS) of 51 cents were below the Zacks Consensus Estimate of 53 cents.

Quarterly net revenue was $1,367.8 million, up 3.8% year over year and was almost in line with the Zacks Consensus Estimate of $1,369 million. The year over year increase in revenue was driven by the kiosk sales. Furthermore, continued growth in the postpaid wireless segment, along with the improvement of prepaid wireless handsets, laptops, and wireless accessories sales aided revenue growth in the quarter.

Quarterly gross profit was $561.1 million compared with $579 million in the prior-year quarter. Gross margin was 41% in the reported quarter compared with 43.9% in the year-earlier quarter. This was mainly due to the weak results in the company’s T-Mobile business, adverse sales mix toward low-margin products and higher promotional and clearance relating to seasonal sells.

Quarterly Selling, General, and Administrative expenses were $438.4 million compared with $425.7 million in the year-ago quarter. Operating income in the fourth quarter of 2010 was $103.3 million, or 7.6% of sales compared with $132.2 million, or 10.0% of sales in the prior-year quarter.

During fiscal 2010, RadioShack generated $155 million of cash from operations compared with a cash generation of $245.8 million in the prior-year period. Free cash flow (cash flow from operations less capital expenditures) in fiscal 2010 was $80.1 million compared with $81 million in fiscal 2009.

At the end of fiscal 2010, RadioShack had $569.4 million of cash & cash equivalent compared with $908.2 million at the end of fiscal 2009. Total debt, at the end of fiscal 2010, was $331.8 million compared with $627.8 million at the end of fiscal 2009. At the end of fiscal 2010, debt-to-capitalization ratio was 0.28 versus 0.37 at the end of fiscal 2009.

Segment-wise Results

U.S. RadioShack Company-operated store segment, which is the prime contributor to the total revenue, was up 1.1% year over year to $1,140.3 million.

Within this segment, Wireless sales were up 12.4%, primarily due to higher Sprint Nextel (S) and AT&T (T) postpaid wireless sales and prepaid wireless handset sales, but was partly offset by  lower T-Mobile postpaid wireless and GPS products sales.

Service revenue was up 7.1% due to higher prepaid wireless airtime. Accessory sales were down 7.4% due to lower sales of digital-to-analog TV converter boxes and related TV antennas, which was slightly compensated by an increase in wireless accessories and headphones sales. Modern Home sales declined 8.8%.

Personal Electronics sales declined 13.4% due to lower sales of digital cameras and digital music players. Power sales decreased 0.7% credited to lower contribution from special purpose batteries while Technical sales increased 0.2% attributable to higher contribution from wire and cables.

Kiosks segment revenue increased 33.6% year over year to $101.2 million. This was primarily attributed to initiation of Kiosk roll out in Target Corp. (TGT) stores, which will be completed by mid 2011.

Other services segment revenue increased nearly 2.9% year over year to $126.3 million.

Financial Outlook

Management estimates total net sales and operating revenues to increase in the low-to mid-single-digit percent range in 2011. This was mostly in line with the current Zacks Consensus Estimate. Fiscal 2011 EPS is expected to be in the range of $1.60 to $1.90 per share. Its mid-point of $1.75 is significantly below the current Zacks Consensus Estimate of $1.80.

The Company anticipates kiosks segment operating income to reduce by approximately $10 million to $15 million in 2011 compared with full year 2010, due to rolling out of new Target Mobile kiosks and by terminating the Sam’s Club kiosks.  The company believes that kiosks segment operating income growth will continue in 2012 following the completion of the Target Mobile kiosk roll out. Capital expenditures are projected in the range of $100 million to $125 million in 2011.

Our Take

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 threat from several fronts may result in lower wireless sales going forward. Precipitous fall in demand for the non-wireless category products, along with continuous decline in gross profit margin remain serious concerns for the company.

We maintain our long-term Underperform recommendation for RadioShack. Currently, it has a Zacks #5 Rank, implying a short-term Strong Sell rating on the stock.

 
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