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
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
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.
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