RadioShack (RSH) is off almost 30% after providing preliminary fourth quarter earnings results that were sharply lower than analyst expectations. The company guided for per-share earnings of 11 to 13 cents, well below the consensus average estimate of 37 cents per share. The company blamed a lower-margin mix of customers with wireless plans through Sprint (S), one of RadioShack's key partners.
RadioShack also eliminated its $200 million share repurchase program, authorized just three months ago, in order to "continue to reinvest in our business." The company's 50 cent dividend -- doubled in conjunction with the buyback -- will remain intact.
The bad news for RadioShack will no doubt entice RSH bears, who are fond of comparing the company to struggling Best Buy (BBY), or now-departed electronics retailer Circuit City. But it's not entirely clear that Monday's news is the beginning of the end for RadioShack.
Quarterly sales actually beat Wall Street estimates, with total revenue up 6% and same-store sales posting 2% growth. Same-store sales will be down for the year, but net revenue will still show a modest rise. Margins were hurt by the Sprint customer mix and higher discounts and holiday promotions. Still, the company was, as noted, still profitable for the quarter. Given that RadioShack generated $85 million in free cash in the first three quarters (excluding favorable working capital adjustments), levered cash flow still looks likely to be in the range of 10% of the company's (now-lower) market capitalization, even given higher interest expense. And at Monday's after-hours close of $8.21, the stock is nearing its tangible book value of about $7.63 per share, while the 50 cent dividend provides an annual yield over 6%.
Numbers aside, however, RadioShack is simply beset by troubles, which have dogged the stock for much of the past few months. Below-consensus third quarter earnings led to a 11% drop, with margin compression an issue as well. The September rollout of Verizon (VZ) wireless products was weaker than expected, causing the 3Q miss; now Sprint customers are eating at the bottom line. In April the company issued $325 million in debt to fund a share repurchase program; that authorization has now been suspended. The heavier debt load has weakened the balance sheet, and interest expense from the debt lowered 2011 EPS by roughly 15 cents and 2012 EPS by 22 cents; all for a program that, in total, resulted in just $113 million in repurchases at an average cost of $15.68 per share. (The bulk of repurchases were made in the second quarter, when RSH traded at or near its 52-week high.) In short, there is no doubt that the company has stumbled badly, and that the nearly 50% haircut from May highs is well-deserved. Even CEO Jim Gooch admitted on the third quarter conference call that the company is in the midst of a "transitional period", and again referred to RadioShack's "transition" in Monday's release.
What investors are left with is a company with roughly no net debt, earnings of about 70 cents per share in 2011 (at the midpoint of fourth quarter guidance), and guidance for lower earnings and "modestly positive" free cash flow in 2012. The company now offers products from Verizon, Sprint, and AT&T (T) -- the nation's three largest mobile carriers -- and saw growth in that segment of 16% in 2011. Unfortunately, sales of the company's legacy retail electronics components -- which offer higher margins -- were off 30% for the year, undermining the improvement in the Mobility segment. The question going forward is whether the short-term stumbles are the sign of a structural flaw in RadioShack's business, or simply management missteps in the company's movement to emphasize its wireless products.
RadioShack plans to report finalized fourth quarter results on February 21st; management will no doubt face a number of questions on the conference call about the company's strategy going forward and even its long-term viability. The question is: is RadioShack on the road to extinction, or has it simply stumbled in its attempted transition from selling cords, cables, and speakers to being a leading retailer of smartphones, tablets, and wireless plans?
While the bears will no doubt spend the week anticipating RadioShack's demise, it's not yet clear that RSH is headed for bankruptcy. Continued growth in Mobility and the expansion of "mini-stores" in Target (TGT) locations mean the company should see limited revenue growth in 2012, albeit at lower margins. Despite the ill-advised notes issue in April, the balance sheet remains strong, the company offers plenty of cash to cover its 6% yield going forward, and continued growth in the Mobility segment will help the company, particularly as it improves its marketing and partnership strategies in the business.
RSH's struggles of late do not stem from macroeconomic conditions or an inability to compete; they are, first and foremost, a management problem. The debt-funded buyback appears to be at least a $100 million mistake (based on lost value and increased interest expense), and the partnerships with Sprint and Verizon have been disappointing, at best. And while a struggling management team is a rare argument in the bull case for a stock, there is a sense that for RadioShack, there is nowhere to go but up. The Mobility segment is going to grow, the company will generate a modest amount of cash, and the dividend will get paid for the near future. If the management team can get its act together -- or an activist investor can get them replaced -- this stock still has potential. Should the stock continue to slide toward $8/share, toward the book value of its assets, risk-tolerant investors should look at RadioShack as a turnaround play.