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RadioShack Corporation (NYSE:RSH) posted its Q3 results, which missed analyst estimates for both EPS and revenues. Yesterday, the stock was down as much as 15.5% in pre-market trading, but has recovered since then. The company had missed earnings estimates in Q1 and Q2 of 2012 as well. The company has been in losses since Q1, and the loss has increased from $-0.08/share in Q1 to $-0.33/share in Q3. Analysts were expecting $-0.17/share on the back of $1.04 billion in revenues for Q3. Actual revenues were flat YoY and came in at $1 billion. In our earlier article, we had recommended to stay away from RSH because of competition from other retailers, and margin pressures for its only growing mobility business. Q3 earnings support our thesis, hence, we reiterate our earlier recommendation.

Q3 performance:

Q3 EPS loss of $0.33 can be compared to the profit of 15 cents in Q3 last year. Revenues of $1 billion are less than $1.03 billion last year.

The company stores are divided into three platforms: mobility, signature and consumer electronics. Only mobility platform sales had improved in Q2 due to sales of tablets and postpaid wireless. In Q3, the postpaid mobility business disappointed with consolidated gross margins slipping 18.6% as compared to last year. The company sold less post paid units, which might be attributed to competition e.g. Best Buy's (NYSE:BBY) mobile stores as well customers holding back purchases to wait for the launch of the iPhone 5 in September. Apple (NASDAQ:AAPL) iPhones are one of the products in demand, but they have low margins. Much of the discussions during the Q&A following the earnings release revolved around declining margins, which highlights the importance of the issue. Operating margins were 4.2% lower and net margin was 4.7% lower than last year.

The company-operated store segment showed a decline in revenues of 3.8%, while operating income showed a decline of 35%. Sales for the other segment, which involves Target stores, website, Mexican subsidiary and independent dealer sales, were flat, resulting in an operating loss of $15.4 million.

The mobility business, particularly the post-paid segment, is the focus of the company, though the company said in the press release that "it will take some time to fully address the challenges this business faces." Consumer electronics platform faces competition from Best Buy and Amazon (NASDAQ:AMZN). Best Buy has recently announced that it will match the prices of online retailer Amazon for the key holiday season sales.

The total debt is $749 million as of 30th September, which is due from 2016-2019. The company was able to raise $175 million to repay convertible notes maturing in 2013 ($287 million principal is still outstanding out of the initial $375 million). A $100 million loan had been raised from Wells Fargo as well, in addition to other loans. Debt is not an issue at present. At the end of last quarter, the company had $546 million in cash and equivalents, which is more that $5/share of cash. The current stock price is almost half of the cash per share.

Q4 expectations and recommendation:

Analysts expect Q4 revenues (which includes holiday season sales) to be the same as last year, i.e $1.39 billion. Q4 EPS is expected to be $0.12, which is also the same as last year.

Bank of America had issued a buy rating on the stock in early October with a price target of $2.5. The short ratio has come down from 16 days to 10 days since our last article, but the percentage of float that is short is still very high at 37%, down from 41% earlier. The consensus target price is $2.54 for RSH.

We recommend staying away from RSH, despite the fact that the shares look cheap, as the pressure on margins is going to continue during the rest of the year.

Source: Avoid RadioShack: Earnings Miss Spells Doubts Over Turnaround Possibility