TEXT-Fitch: no respite for RadioShack following Q4 report
Feb 26 - RadioShack reported Tuesday, February 28 its 4Q12 results, which remained under significant pressure, with declines in comparable store sales accelerating to negative 7%. For 2012, comps declined 3.5% and EBITDA came in at $48 million (excluding noncash stock-based compensation), which was less than Fitch Ratings' $50 million-$60 million expectation and a sharp contraction from $284 million in 2011 and $444 million in 2010. We expect EBITDA could turn negative in 2013, with no apparent catalyst to stabilize or improve operations. RadioShack's push into the lower margin mobile business (which today represents 53% of sales versus 30% in 2007) has caused significant gross margin pressure over the past few years. While overall gross margin declined almost 480 basis points in 2012 to 36.7% (following gross margin declines over the past five years from a level of 47.5% in 2007), gross margin excluding mobility for the year was relatively flat. This would indicate that gross margin in the mobility business declined close to 900 basis points in 2012 to an estimated level of 19%-20%. Of RadioShack's three key product platforms, mobile has been more sluggish than anticipated. Consumer electronics (CE) is in a double-digit decline and, while its high margin signature business appeared to have stabilized in 2012, we do not expect more than modest gains going forward. The company's mobile segment (53% of 2012 consolidated sales) is being driven by lower margin smartphones (predominantly iPhone sales as well as Android-based smartphones), which push segment margins lower in a business that already carries relatively low margins. As disclosed in RadioShack's 10-K, the most significant contributing factor to the decline in consolidated gross profit dollars and margins was the postpaid wireless business that saw a decline in both transaction volume across the year and a lower margin rate. We expect transaction volumes to remain under pressure going forward. Sales in the CE segment (15.5% of sales) declined another 20% in 2012. The segment plays in an intensely competitive environment where consumers are very price sensitive and continue to shift their purchases online. Additionally, RadioShack's smaller footprint does not allow it to carry the breadth of products that would make it competitive versus other brick-and-mortar and online channels. As a result, this segment is expected to remain under significant pressure. Sales in its high margin signature segment (31% of sales) -- which includes accessories, including mobile-related products such as headphones, and power and technical products -- increased 2.2% to $1.3 billion in 2012, after being on a decline since 2008 (segment accounted for 47% of sales in 2007). Gross margins in this segment are estimated at 65%-70%, making it a significant driver to consolidated earnings. However, we do not expect more than modest gains for this business going forward. Effective April 8, 2013, RadioShack is terminating the Target Mobile centers joint venture with Target Corp. (Target). We view this as a positive, as the discontinuance will eliminate a drag on profitability, evidenced by $37.5 million in operating losses in this venture in 2012. Still, we expect EBITDA could turn negative in 2013. RadioShack has adequate liquidity, with $536 million in cash (excluding restricted cash) and $393 million available on its secured credit facility at year end. However, we note increasingly negative free cash flow and required debt repayments (including the remaining $287 million of 2.5% convertible notes due August 2013) will materially reduce its financial flexibility. Fixed obligations for 2013 are estimated at $115 million-$140 million with interest expense of $45 million-$50 million and capital expenditures in the $70 million-$90 million range. With projected negative EBITDA, these expenditures will have to be financed with existing cash or new borrowings. Please see our full rating report on RadioShack published on Jan. 18, 2013 for a more in-depth analysis, available at www.fitchratings.com Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
- U.S. Mega Millions lottery up to $400 million, 2nd-biggest ever
- Uruguay becomes first country to legalize marijuana trade
- Pope Francis named Time's Person of the Year
- Thousands of South Africans line up to see Mandela lie in state |
- China bitcoin arbitrage ends as traders work around capital controls