BANGALORE (Reuters) - Cost-cuts helped RadioShack Corp RSH.N beat estimates in the second quarter, but its shares fell 8 percent on fears the electronics retailer might not be able to sustain profits by merely controlling expenses.
Stifel Nicolaus analyst David Schick wondered whether the retailer had gone too far with its cost-cutting efforts -- to the extent that they hurt the company's chances of gaining market share in a time when competitors like Circuit City Stores Inc CCTYQ.PK have gone away.
In the second quarter, RadioShack managed to reduce selling, general and administrative expenses about 11 percent by mainly keeping a tight lid on advertising costs.
“They will have to spend a bit more on advertising costs over the rest of the year if they want to be able to drive sustainable same-store sales increases,” Barclays Capital analyst Michael Lasser told Reuters.
Although cost-cutting should prop RadioShack’s earnings for the rest of the year, Wedbush analyst Michael Pachter advised investors to “remain on the sidelines.”
The retailer -- which has about 4,450 company-operated stores, almost 1,400 dealer outlets and nearly 600 wireless phone kiosks throughout the United States -- has closed unprofitable stores and cut staff in recent years to turn around its business.
“RadioShack has almost made a habit out of squeezing more costs out of its operation than expected, but this quarter appears to be particularly impressive -- especially since it has generally been thought that the cost-cutting must run out at some point,” RBC Capital Markets analyst Scot Ciccarelli said.
Net income at the Fort Worth, Texas-based retail chain rose to $48.8 million or 39 cents a share in the second quarter, from $41.4 million, or 32 cents a share, a year earlier.
Analysts had expected earnings of 29 cents a share, according to Reuters Estimates.
The electronics retailer, which signed a deal with T-Mobile USA Inc last week to expand the scope of its wireless offerings, said sales of netbooks, prepaid wireless handsets and digital televisions improved in the quarter.
CONVERTER BOX MAGIC SHORT-LIVED
RadioShack -- which had seen sales of its converter boxes rise due to a mandatory switch of all U.S. televisions to digital last month -- expects a fall in the sales of these units in the second half of the year, the company said in a regulatory filing.
While converter box sales amounted to about $120 million in the first six months of 2009, they were about $50 million in the second quarter.
RadioShack faces a weak retail environment as Americans spend less on nonessentials in a deepening recession. It also faces tough competition from Best Buy Co Inc BBY.N and discounters like Wal-Mart Stores Inc WMT.N in sales of consumer electronics.
RadioShack, which operates around 200 stores in Mexico, saw second-quarter revenue fall 2.9 percent to $965.7 million.
Same-store sales, or those at stores open at least a year, fell 4 percent in the period. The retailer blamed the decline on weaker sales of wireless accessories, digital-to-analog converter boxes, GPS products, music players and digital cameras.
“There will be noise in the company’s sales growth because of the changing impact from these converter boxes; but if you exclude that, and they still aren’t able to generate some positive comp increases, that would be concerning,” Lasser said. He has an “equal” rating on the stock.
RadioShack’s shares fell to an intraday low of $14.77 before recouping some of their losses to trade down 84 cents or 5.2 percent at $15.22 Monday afternoon on the New York Stock Exchange.
Despite Friday’s stock move of more than 10 percent, RadioShack shares remain very inexpensive in a market where many retail valuations have become stretched, Ciccarelli wrote in a note to clients.
“Given the second quarter’s upside and the addition of T-Mobile to the wireless franchise, we believe the risk/reward is still biased toward the upside,” said Ciccarelli, who has an “outperform” rating on the stock.
Reporting by Dhanya Skariachan; Editing by Gerald E. McCormick and Maureen Bavdek
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