RadioShack’s Q3’15 Earnings Review: The Company Dreams Of A Better Fiscal 2016

RadioShack’s (NYSE:RSH) Q3 2015 earnings did not help abate investor scepticism around the stock, which continued its downward spiral and declined by about 9% after the earnings release on December 11. (Fiscal years end with  January.) The company’s stock price has declined drastically in the last few years, from around $10 in 2010 to around $0.50 at present, on account of an eroding top line growth, declining gross margins, high inventory levels, a string of debt maturities and declining cash reserves. A legal notice by its key lenders, accusing the company on defaulting on the $250 million loan provided by them a year ago, has added to RadioShack’s vows and acts as a major roadblock to its turnaround path. (Read: RadioShack’s Tussle With Its Lead Lenders Can Leave The Company Bankrupt)

RadioShack reported total net sales of $650 million for Q3 2015, 16.1% lower compared to Q3 2014, reflecting continued challenges in its postpaid mobility business. Gross margin improved from 31.1% in Q3 2014 to 32.9% in Q3 2015 due to the shift in product mix from mobility to retail. The company’s net loss expanded to $161 million, compared to $136 million in Q3 2014. On the positive side, comparable store sales for U.S. company-operated stores were only down 1% over the three-day Thanksgiving holiday period. In contrast, the reported Black Friday numbers for the industry at large were down in the 11% range. ^[1] Additionally, the core network of RadioShack’s interactive remodel stores collectively performed 12 percentage points better than the total chain on a comparable basis, and in the retail segment performed almost 15 percentage points better on a comparable basis.

The company’s turnaround plan is focused on three key initiatives:  reducing cost and its negative cash flow, driving growth and profitability through the retail platform, and returning to a healthy mobility business.

Our price estimate of $0.86 for RadioShack is at a significant premium to the current market price. We are in the process of updating our model for the Q3 2015 earnings release.

See our full analysis for RadioShack

Cost Cutting Initiatives To Continue Till Fiscal 2016

RadioShack is in the process of making significant reductions in its cost structure in order to provide the additional liquidity and time necessary to see the effect of its turnaround strategy. The company started its cost reductions near the end of Q3 2015, and expects to see more results of the initiatives taken in the current quarter. It plans to continue its cost cutting initiatives into early fiscal 2016 with the goal of moving to a positive free cash flow position early in the new fiscal year. It claims to have begun a very detailed cost reduction plan, which encompasses a range of operating cost reductions related to headquarters, field, stores and store support, to improve operational efficiency and right-size the business as well as the benefit of targeted store closures, that will enhance earnings by nearly $400 million annually. The company has identified more than $200 million in incremental cost savings that are not related to store closures. Below are some of the steps: 

– RadioShack is making changes in its store staffing model with a leaner and more efficient approach to field cost structure. It has reconfigured store hours at select locations, that have reduced operating costs at an annualized rate of $36 million. In addition to this, the company has identified $47 million of additional savings from further changes to store staffing model and overtime structure, which will be effective at the beginning of next week. A 50% reduction in field managers will save approximately $17 million annually, in the company’s view. ((RadioShack’s (RSH) CEO Joe Magnacca on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, December 11, 2014))

– Radioshack previously reduced headcount through attrition and other departmental realignments by almost 9% or $7.3 million annually. In September this year, the company reduced its Asia operational costs by 40% for annual savings of $3 million. In early January next year, it plans to reduce headcount by an additional $18 million, which when combined with the previous cuts will achieve a greater than 30% corporate cost reduction.

– The company also plans to rightsize its marketing and advertising budget given the realities of a smaller store base, and intends to focus on more targeted spending. RadioShack estimates the move to save approximately $105 million over the next fiscal year. Overall, it aims to bring its marketing expenses (as % of revenue) more in line with competition. It has initiated the process in the current quarter and claims that the lower marketing spend has had no visible impact on retail sales.

– RadioShack  has implemented additional expense controls related to outsourcing programs. It has lowered its annual professional fees by almost $14 million already and expects to achieve another $27 million in annual expense savings following the completion of the store closure and recapitalization efforts anticipated in Q1 2016.

The company has already closed 175 stores and continues to work with its lenders toward moving forward with the additional store closures that will get it closer to its 1,100-store target, which would enhance overall EBITDA by approximately $83 million annually. The store closures are targeted to create an additional $87 million of one-time liquidity benefit from reduced and focused inventory levels.

Retail Effort Is Working Though The Mobility Category Is Still Experiencing Challenges

RadioShack’s retail platform sales declined $10 million while its mobility platform sales were down $92 million in Q3 2014, compared to the same period last year. The retail comparable store sales in RadioShack U.S. corporate stores were up 35% over the three-day Thanksgiving period, while mobility was down 27% primarily due to the lack of availability of the new handset offering that launched during the period and aggressive competition in the segment. The company believes that it is making good progress on its retail strategy and the same will be a core driver of its turnaround efforts. It is taking significant steps to drive profitable mobility sales in the future.

A key component of RadioShack’s store revamp initiative has been an increased focus on private brands. It claims to be seeing significant strength in this category and expects the momentum in private brands to continue to pick up in Q4 2015.

Constrained inventory of iPhone 6 and iPhone 6 Plus devices contributed most significantly to the decline in the mobility sales in Q3 2015. RadioShack is currently working with its carriers to align its goals and business plans. The company has partnered with Trust A.B. to reduce credit risk on postpaid customers, meaningfully improving credit quality of sales and reduce charge-backs from carriers that have significantly impacted profitability in prior periods.

RadioShack claims that it is beginning to see the positive indicators relating to its mobility business, such as a shift in sales toward prime credit customers. It is also seeing a decrease in early deactivation which, the company believes, will lead to lower chargeback rates from carriers and thus improve profitability.

Since the month of October represented the lion share of the change in both the retail and mobility businesses, the Q3 2015 results do not fully reflect the benefit of the work underway.

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1. RadioShack’s (RSH) CEO Joe Magnacca on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, December 11, 2014 [↩]