Mounting Losses Continue to Plague RadioShack In Q1’14

Releasing its Q1 2014 earnings on June 10, RadioShack (NYSE:RSH) reported yet another quarter of declining revenue and widening losses. The company marked its ninth consecutive quarterly loss in Q1 2014 as its net loss widened to $98 million, compared to $28 million in Q1 2013.  The loss was driven both by lower sales and increased pressure on gross margins. Its revenues declined by 13% on account of a weak consumer electronics environment, lower traffic and a soft mobility market.

RadioShack, which has been a prominent player in the electronics retail business for over 90 years, has been struggling to survive in the industry with rising competition from online retail giants such as Amazon (NASDAQ:AMZN), online auction sites like eBay (NASDAQ:EBAY), as well as other physical retailers such as Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT). In the last few years, RadioShack has been plagued by an eroding top line growth, declining gross margins, high inventory levels, a string of debt maturities and declining cash reserves.

Despite its liquidity position being negatively impacted by the operating losses over the past two years, RadioShack believes that its current liquidity will provide the financial flexibility to continue executing its strategic turnaround plan over the next 12 months. However, for this the company anticipates that sales and gross margins will improve over the next 12 months in the mobility and retail business segments.

Though RadioShack claims to have made progress on its turnaround initiative, it has failed to show any significant financial gains so far. The RadioShack stock was down more than 10% after the Q1 2014 earnings release. We are in the process of updating our valuation for the company.

See our full analysis for RadioShack

Mobility Business Suffers Due To Low Consumer Interest: New Products Can Spur Demand

RadioShack derives over 50% of its revenue from the mobility division, and thus its Q1 2014 earnings were significantly impacted by the 19% decline in the mobility platform comparable store sales. Low consumer interest in the current assortment of handsets, aggressive promotional environment on these products and intense wireless carrier marketing activities were key factors responsible for the weak mobility earnings.

The mobility market has been soft for a number of quarters, and RadioShack believes that the lack of consumer enthusiasm for the current assortment of handset choices, both on the postpaid side and on the prepaid side of the business, is responsible for the low demand. It expects that new products from key vendors this fall—including the Hero product from Apple, new wearable products from Samsung and new mobility products from LG—will spur demand in the future.

Additionally, most of the carriers have introduced new equipment installment plans or financing options over the past few months and have started promoting them heavily. These options are initially only available at carrier stores but will start selling at national retailers (like RadioShack) soon. RadioShack recently rolled out Sprint’s easy-pay program and Verizon’s Edge program.  And it is working closely with AT&T to implement the AT&T Next program. These carrier financing programs provide the customer with more choices on how to pay for the handset and provide more flexibility on when they can update to the next generation handset.

Gross Margins To Remain Under Pressure

Radio Shack’s gross margins have declined from 43% in 2011 to 34% in 2013. Gross margin declined from 40.2% in Q1 2013 to 36.5% in Q1 2014, on account of the strong promotional and pricing environment in the mobility business, along with discounting and margin pressure in RadioShack’s retail business.

A higher proportion of low margin products in its portfolio, price competition from other players in the market, and high promotional and re-branding costs are the primary factors negatively impacting RadioShack’s bottom line. Margins will remain under pressure due to the following factors:

– Higher sales of lower margin wireless products: RadioShack has been betting big on shifting its focus to mobility devices like smartphones and tablets, an area which is expanding fast but offers comparatively lower margins. Its revenue contribution from the mobility division has risen from 44.2% in 2010 to 52.4% in 2013.

– Competitive pressure can limit growth: The entry of online retail giants has altered the landscape for the consumer electronics market. Retailers like Walmart and Amazon are taking business away from pure-play consumer electronics stores by offering lucrative discounts. Showrooming, a phenomena where customers use physical stores to check out products and gain hands-on experience with gadgets but use online stores to make the purchase, has negatively impacted sales of traditional brick-and-mortar retailers. Price competition from other established players can restrict Radio Shack’s top line growth and, if the company does end up offering lower prices, it will have to take a hit on its gross margins. RadioShack’s smaller footprint does not allow it to carry the breadth of products that would make it competitive vis-a-vis other brick-and-mortar retailers and online channels.

RadioShack To Close 200 Stores Per Year For The Next Three Years

Consolidating its store base is a key part of RadioShack’s startegic turnaround initiative. In its Q4 2013 earnings call, RadioShack announced its plan to close around 1,100 (almost 25% of its total store count) of its under-performing stores in the U.S. However, the company retracted its plan as it was unable to reach an agreement to do so with the lenders. RadioShack’s current credit agreements reportedly allow it to close only about 200 stores without the approval of lead lenders Salus Capital Partners and GE Capital. ^[1] In the absence of the consent, RadioShack plans to close up to 200 stores per year over the next three years. ^[2]

RadioShack claims that it continues to have a strong, productive and positive relationship with its lenders.

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1. WSJ: RadioShack Mired In Talks With Lenders Over Store-closure Plans, Nasdaq.com, April 16, 2014 [↩]
2. RadioShack’s (RSH) CEO Joe Magnacca on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, June 10, 2014 [↩]