RSH
Maybe they're buying more shares so Day can sell his.
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J TALES OF THE TAPE: Not Much Love At The RadioShack >RSH
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By Mary Ellen Lloyd
Of DOW JONES NEWSWIRES
RadioShack Corp. (RSH) investors have pulled the plug on hopes of a quick turnaround at the struggling consumer-electronics chain.
Fading optimism that the retailer has a viable plan to reverse declining sales has many investors and analysts cautious on the stock. After more than doubling to a52-week high of $35 in mid-June, RadioShack shares have tumbled by a third to $23.42 as of Thursday's close.
Still, some company watchers expect further declines. RadioShack is running out of cost cuts to boost earnings at the same time consumer spending may be taking a hit.
"Higher gas prices, subprime mortgage problems - I would argue that actually impacts a RadioShack customer more than, say, a customer of Best Buy or Circuit City," who tend to have higher incomes, said Richard Weinhart, an analyst with BMO Capital Markets. He thought Wall Street's earnings forecasts for the critical fourth quarter were too high even before the economic and financial turmoil of recent weeks, and he expects shares to drop to $18 in the next 12 months.
Tighter credit markets are also quashing hopes for a buyout, even if that possibility had always been remote, he and others say.
A RadioShack representative said the company declined to comment for this article.
Chief Executive Julian Day, who helped Kmart emerge from bankruptcy in a previous job, gets kudos on Wall Street for squeezing costs out of the existing business during his first year at RadioShack.
Job cuts at the Fort Worth, Texas, headquarters - which drew criticism for being announced to affected employees via email, closures of roughly 500 stores and reduced advertising have all helped profitability. In the latest quarter, operating margin improved to a respectable 7% from less than 1% a year earlier.
Tough Comparisons
But margin gains disappointed some analysts, who noted that RadioShack faces tough comparisons the next two quarters because it benefited from cost cutting a year ago.
"The majority of opportunities to improve profitability have been identified," said Jefferies & Co. analyst Timothy Allen. "Furthermore, RadioShack's competitive positioning and customer relevance continue to erode." He expects shares will underperform the market as investors lower their expectations.
Indeed, RadioShack shares have underperformed the S&P 500 since the company's fiscal second-quarter earnings report in early July. But they remain above analysts' median price target of $21.50, according to Thomson Financial.
At 13.8-times the mean analyst estimate for next year's earnings, RadioShack shares trade at a premium to Best Buy Co.'s (BBY) 12.2 price-to-earnings multiple and to Circuit City Stores Inc.'s (CC) P/E ratio of 13.6.
Short interest, meanwhile, fell last month, but it remains at roughly 18% of shares outstanding and is higher than Best Buy and Circuit City.
Cost cutting aside, the bigger worry is that RadioShack has shown no signs of reversing six consecutive quarterly declines in sales at comparable stores, including a 9% drop in the latest period. Day hasn't said much about his strategy to jump-start sales, and some on Wall Street are getting impatient.
"We believe a 12x P/E multiple is appropriate for a company with no square footage growth, an aging store base and struggling to drive comps," said Banc of America Securities analyst David Strasser as he downgraded RadioShack to sell from neutral in July.
Several top fund managers, including Fidelity and T. Rowe Price, reduced their positions in RadioShack even before the earnings report, according to filings with the Securities and Exchange Commission. Those firms declined to comment.
Large Network Of Stores
RadioShack's roughly 6,000 company- and dealer-owned stores put the chain within five minutes of where 94% of all Americans live or work, according to Jefferies research. But the retailer hasn't figured out how to capitalize on its fleet of stores - "the one asset that they uniquely have in this space," according to Craig Johnson, president of a consumer and retailing consultancy in New Canaan, Conn.
Wireless phones and service plans typically generate about a third of RadioShack's sales, but sales dropped 17% in the latest period, continuing a slide since the retailer in 2006 switched to carrying AT&T plans rather than Verizon. Locked out of selling Apple Inc.'s (AAPL) new iPhone, RadioShack also faces tougher competition as Best Buy adds hundreds of new stores aimed at the wireless business.
Even some of RadioShack's previously strong product categories deteriorated last quarter. Sales of high-margin accessories fell 4%, and digital music player sales also faltered.
Analysts agree that new product introductions over the next 12 months are unlikely to add meaningfully to RadioShack's earnings. And CEO Day has said very little about how he plans to jump-start sales. Meanwhile, flat-screen TV prices continue to fall, pressuring margins for a category that already doesn't get much space in RadioShack's small stores.
Johnson suggests RadioShack look to the drugstore industry for ways it could shift its focus from competing with bigger rivals like Best Buy to competing with other types of merchandisers. For instance, RadioShack can add more services, like the way drugstores help customers edit and print their own photos. That would help RadioShack capitalize on its ubiquitous stores.
Pali Capital analyst Stacy Widlitz said RadioShack could use some of its growing cash balance to buy back stock. But even if it used half of its $630 million in cash to do that, it would add only about 10 cents a share to 2008 earnings, she said.
Carol Levenson, director of research for credit research firm Gimme Credit, said RadioShack may face increasing pressure from shareholders to use its cash for buybacks. But the company terminated its commercial paper program in the second quarter, citing improvements in liquidity.
"This leaves the retailer once again facing its annual seasonal inventory build
.. without access to the commercial paper market or, we would guess, to any public debt market," Levenson said.
With $150 million in debt maturing in the quarter and the seasonal inventory buildup requiring $200 million to $400 million in cash, Levenson said, "the liquidity provided by the $630 million in cash on the balance sheet is vital." None of the analysts owns shares of Home Depot, but RadioShack has been a client of Banc of America Securities in the last 12 months.
(Mary Ellen Lloyd covers home-related retailers for Dow Jones Newswires.)
-By Mary Ellen Lloyd, Dow Jones Newswires; 704-371-4033; maryellen.lloyd@dowjones.com
(END) Dow Jones Newswires
September 04, 2007 07:30 ET (11:30 GMT)
Copyright (c) 2007 Dow Jones & Company, Inc.- - 07 30 AM EDT 09-04-07 |
