We downgrade our recommendation on
) to Underperform based on its disappointing performance. We do
not find any immediate growth catalyst and consequently do not
expect the company to achieve profitability anytime soon.
Why the Downgrade?
A major near-term concern for RadioShack is the significant
decline in its gross margin. In the second quarter of 2013, gross
margin was 37.2% compared with 40.1% in the prior-year quarter.
This was mainly due to an unfavorable sales mix of lower-margin
smartphones and other mobile devices.
Importantly, RadioShack announced that this trend will
continue in the near future due to revamping of the core retail
electronics segment. We believe RadioShack has lost its market
leadership as a high-margin device retailer and is eventually
transforming into a low-cost low-margin device supplier.
Moreover, consumers now prefer purchasing online to visiting
retail stores. Declining foot traffic has severely affected
RadioShack's business. Most of the consumers prefer tablets and
smartphones, which are less profitable for the retail industry.
The core retail business of RadioShack, namely, the consumer
electronics (including digital TVs, digital music players, and
digital cameras) platform continues its free fall.
Importantly, core businesses have some material effect on the
Wireless business. Core businesses indirectly drive wireless
sales through increased foot traffic. Most of the customers who
entered RadioShack stores intending to buy core products were
generally attracted toward its latest wireless offerings.
Other Stocks to Consider
RadioShack currently has a Zacks Rank #5 (Strong Buy). While
we prefer to avoid RadioShack until we see signs of improvement
in the company's performance, other electronics retail stocks
worth a look are
Best Buy Co. Inc.
). All these stocks carry a Zacks Rank #2 (Buy).
BEST BUY (BBY): Free Stock Analysis Report
GAMESTOP CORP (GME): Free Stock Analysis
HHGREGG INC (HGG): Free Stock Analysis Report
RADIOSHACK CORP (RSH): Free Stock Analysis
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