RadioShack: Beware Of The 'Value' Trap

| About: RadioShack Corporation (RSH)

Shares of electronic goods retailer RadioShack (NYSE:RSH) fell 10.5% today after the company announced a surprise loss for the first quarter of 2012.

First Quarter Results

RadioShack reported a $8 million loss for the first three months of this year against a net profit of $35.1 million in the first quarter of 2011. Analysts expected the company to report a $0.05 quarterly profit, but instead the company reported a $0.08 loss as a $4.1 million early retirement of debt charge impacted earnings.

Revenues fell 0.9% on the year to $1.01 billion as comparable store sales fell 4.2% primarily attributable to a decline in Sprint postpaid wireless sales. Analysts were looking for a 4% increase in revenues to $1.06 billion.

Gross margins compressed some 560 basis points to 39.1% impacted by an unfavorable sales mix driven by lower margin smartphones sales and tablet devices. The mobile device-focused strategy has resulted in weak earnings on fierce competition for cell phones and a general weak electronics market.

RadioShack stores

Same stores sales fell 6.9% on the year driven by a 24.1% decline in electronic sales. Mobility sales which grew 15.7% in the fourth quarter fell 5.2% on the year as the company reported lower postpaid wireless sales from Sprint. The company has initiated steps to make improvements in the marketing and execution strategy during the remainder of the year.

CEO Jim Gooch said the following "As we anticipated, the first quarter was extremely challenging. While our results were disappointing, we are working quickly to drive top line growth and expand margins. We were pleased to see progress from initiatives we began implementing last year".


The company did not specify financial targets for the second quarter of 2012 or the remainder of the year. CEO Gooch added that the company remains committed to cost control and cash management and is confident to drive sequential quarterly improvement throughout 2012. The financial position allows the company to remain flexible during this downturn and continue to pay a dividend, thereby delivering value to its shareholders.


RadioShack ended the first quarter with $594 million in cash and equivalents. The company held $675 million in long term debt for a net debt position of roughly $80 million. After today's decline the market values the firm at $535 million which represents a mere 0.12 times annual revenue multiple and values the firm at 7 times 2011's annual earnings. The revenue multiple puts the valuation in line with troubled competitor BestBuy (NYSE:BBY) which trades around 0.15 times annual revenues.

Despite the loss during the first quarter the company pays a $0.125 quarterly dividend for an annual dividend yield of 9.3%

Investment Thesis

Shares in RadioShack have fallen 45% year to date as the electronic retailer struggles to formulate a strong strategy towards the future and continues to drift along in the meantime. Shares have fallen roughly 75% since recent highs of $24 in 2010 as waning consumer demand, fierce competition in the cell phone business and strong online electronic competition from (NASDAQ:AMZN) have all been eating into RadioShack's revenues and margins.

The company has reported stagnant revenues over the last couple of years as profitability has waned to the point where the company has lost money during the first quarter of 2012. On traditional valuation metrics the shares are very cheap but unless the company can formulate a credible long term strategy, investors might be falling into the "value" trap.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.