Seeking Alpha
Profile| Send Message|
( followers)  

RadioShack (NYSE:RSH) began selling Apple's (NASDAQ:AAPL) iPad 2 tablets Tuesday and, according to news reports, they sold out in a matter of hours. "Not hard," you may be thinking, given the scarcity of iPad 2s at this stage. But that’s just the point: This is a hot product and a hot category, where demand is expected to remain strong. With RadioShack’s low average ticket and focus on mobility, the company could see a stronger boost to its business than any other competitor.

I have written about RadioShack before, claiming that it still has a lot relevancy because of its convenience, service, its PBA (Parts Batteries and Accessories) business and its strong position in wireless. Additionally, RadioShack can absolutely compete with other retailers for smaller devices. What has been missing is new products outside of its core wireless and PBA businesses. Tablet computers are certainly one big step in that direction.

While RSH has risen on the iPad 2 announcement, I don’t think the stock is capturing how big an impact tablets could be. RadioShack is not like other large, diversified consumer electronics retailers. One hot product can have an outsized impact on its sales and earnings. It has happened numerous times over the last 10 years (i.e. DirecTV, satellite radio, MP3 players) and seems even more likely with a big-ticket item like a tablet. Additionally, RadioShack’s business has been negatively impacted the last few quarters from declining netbook sales that would appear to be directly related to displacement by tablets. Now, RadioShack is in the game.

While some might be concerned about RadioShack’s ability to display tablets, the company has been actively upgrading some of its stores in preparation for this year’s tablets and e-book launches. The new displays are similar to the fixtures RSH has for mobile phones, which allow you to pick up and use a tethered device. This is really more a holiday issue, when the company has a full selection of tablets for customers to compare and contrast. Right now, iPads and other tablets are selling out so fast, stores don’t need to display them.

For 1Q, the impact from iPad sales is likely going to be tiny. I believe 500 RadioShack stores had anywhere between two and 12 iPads come in and sell out immediately. Assuming an average of five per store at $500, RadioShack’s 1Q same store sales (SSS) just got a 15 basis point boost. However, if we assume RadioShack gets a similar allocation every two to four weeks in 2Q, the increase is more like 60-120 bp. Still not huge, but this does not include other tablet sales, any accessories or wireless contracts. More importantly, the allocations should start to go up at some point.

To estimate the impact on RadioShack from the addition of tablets as a fully rolled-out category, consider that the technology forecasting group Gartner (NYSE:IT) expects the market for tablets to reach 54 million units worldwide this year, or about 21.5 if we assume the U.S. is about 40% of market. If we use the $500 price and ignore all the potentially lucrative wireless contracts, accessories and additional traffic that tablets can generate, RadioShack would get a 3% boost to its sales for every 1% market share it garners in the tablet space. If RadioShack could match its share in tablets to its overall market share in consumer electronics, this would mean a 9% boost from tablets.

Some investors may think applying its 3% overall market share to tablets is too high, but keep in mind that the company does not compete in many categories (e.g., desktop computers) or competes poorly in them due to space constraints (e.g., large screen TVs). In many categories with small, portable devices like mobile phones, RadioShack has done extremely well, with market share over 10% at times. But even if you only assumed a very low 1% market share, a 3% boost to sales added to its strong mobile phone business would still place Shack’s sales above expectations for the second half of the year.

For a stock with strong free cash flow, trading at a P/E of only 8x 2011 forecasts, it doesn’t take much of a catalyst to change the momentum and psychology in the stock. This recent bounce could turn into a sustainable move up as the full impact of tablet sales on RadioShack becomes clear.

Source: Tablets Should Provide a Powerful Sales Boost for RadioShack