Fitch: No Respite for RadioShack following 4Q12 Report
NEW YORK -- February 26, 2013
RadioShack reported Tuesday, February 26 its 4Q12 results, which remained
under significant pressure, with declines in comparable store sales
accelerating to negative 7%. For 2012, comps declined 3.5% and EBITDA came in
at $48 million (excluding noncash stock-based compensation), which was less
than Fitch Ratings' $50 million-$60 million expectation and a sharp
contraction from $284 million in 2011 and $444 million in 2010. We expect
EBITDA could turn negative in 2013, with no apparent catalyst to stabilize or
RadioShack's push into the lower margin mobile business (which today
represents 53% of sales versus 30% in 2007) has caused significant gross
margin pressure over the past few years. While overall gross margin declined
almost 480 basis points in 2012 to 36.7% (following gross margin declines over
the past five years from a level of 47.5% in 2007), gross margin excluding
mobility for the year was relatively flat. This would indicate that gross
margin in the mobility business declined close to 900 basis points in 2012 to
an estimated level of 19%-20%.
Of RadioShack's three key product platforms, mobile has been more sluggish
than anticipated. Consumer electronics (CE) is in a double-digit decline and,
while its high margin signature business appeared to have stabilized in 2012,
we do not expect more than modest gains going forward.
The company's mobile segment (53% of 2012 consolidated sales) is being driven
by lower margin smartphones (predominantly iPhone sales as well as
Android-based smartphones), which push segment margins lower in a business
that already carries relatively low margins. As disclosed in RadioShack's
10-K, the most significant contributing factor to the decline in consolidated
gross profit dollars and margins was the postpaid wireless business that saw a
decline in both transaction volume across the year and a lower margin rate. We
expect transaction volumes to remain under pressure going forward.
Sales in the CE segment (15.5% of sales) declined another 20% in 2012. The
segment plays in an intensely competitive environment where consumers are very
price sensitive and continue to shift their purchases online. Additionally,
RadioShack's smaller footprint does not allow it to carry the breadth of
products that would make it competitive versus other brick-and-mortar and
online channels. As a result, this segment is expected to remain under
Sales in its high margin signature segment (31% of sales) -- which includes
accessories, including mobile-related products such as headphones, and power
and technical products -- increased 2.2% to $1.3 billion in 2012, after being
on a decline since 2008 (segment accounted for 47% of sales in 2007). Gross
margins in this segment are estimated at 65%-70%, making it a significant
driver to consolidated earnings. However, we do not expect more than modest
gains for this business going forward.
Effective April 8, 2013, RadioShack is terminating the Target Mobile centers
joint venture with Target Corp. (Target). We view this as a positive, as the
discontinuance will eliminate a drag on profitability, evidenced by $37.5
million in operating losses in this venture in 2012.
Still, we expect EBITDA could turn negative in 2013. RadioShack has adequate
liquidity, with $536 million in cash (excluding restricted cash) and $393
million available on its secured credit facility at year end. However, we note
increasingly negative free cash flow and required debt repayments (including
the remaining $287 million of 2.5% convertible notes due August 2013) will
materially reduce its financial flexibility. Fixed obligations for 2013 are
estimated at $115 million-$140 million with interest expense of $45
million-$50 million and capital expenditures in the $70 million-$90 million
range. With projected negative EBITDA, these expenditures will have to be
financed with existing cash or new borrowings.
Please see our full rating report on RadioShack published on Jan. 18, 2013 for
a more in-depth analysis, available at www.fitchratings.com
Additional information is available on www.fitchratings.com.
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Monica Aggarwal, +1-212-908-0282
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