RadioShack Scores with Investors

Shares of the electronics retailer jumped Tuesday after it reported improved quarterly results

When RadioShack (RSH) in October announced a money-losing third quarter, its new CEO Julian Day insisted that the consumer electronics retailer had already taken crucial steps to turn itself around. Now, after cutting costs and pushing to sell faster-moving products like MP3 players, the Fort Worth (Tex.) company said on Feb. 27 that it posted a profit during the fourth quarter.

RadioShack's net income amounted to $84.5 million during the three months ended Dec. 31, up 65% compared to the same period last year. "Our team put forth a tremendous effort executing our plan during the fourth quarter. We have made great progress in some areas, while other areas such as the wireless business remain a challenge," Day said in a press release.

Founded in 1967, RadioShack has pinned its growth prospects on technology cycles, such as the personal-computer boom in the 1980s. But RadioShack's jump on the latest wave of cellular phones has started to backfire as the industry matures in recent years, making customers harder to find. Meanwhile cellular providers such as Verizon Communications (VZ) have opened up retail outlets of their own, adding competitive heat to RadioShack's struggle (see, 10/25/06, "More Static for RadioShack").)

After taking steps in recent months to trim costs, RadioShack had 4,467 U.S. company-operated stores at the end of the fourth quarter of 2006, down 505 from the previous year. With fewer stores, the company's total sales in the fourth quarter fell by $214 million year over year to $1.458 billion. Sales at stores open more than a year dropped by 7.7% year over year, largely due to losses in postpaid wireless and personal electronics. But the company had sales increases in its sales of pre-paid wireless, MP3 players, and accessory products.

"While we favor the continued closing of underperforming stores and believe that the consumer electronics product cycle will remain healthy near-term, we question the longer-term potential for margin improvement, given the ultra-competitive electronics retailing industry," said Standard & Poor's equity analyst Michael Souers in a Feb. 27 research note. (S&P, like, is owned by The McGraw-Hill Companies.) But Souers raised his 2007 earnings per share estimate given a better near-term cost outlook, which brought the 12-month target price on the stock up by $6 to $21.

Investors bid up the stock 12% to $25.13 per share in New York Stock Exchange trading Feb. 27. RadioShack managed to climb even as investors worried about the economy after a plunge in China's stock exchange overnight (see, 2/27/07, "China Slump Fuels Wall St. Meltdown").

But CEO Day has been slashing costs with tough moves like slashing headcount and reducing advertising expenses. His company's selling, general, and administrative expenses were $482.8 million during the quarter, down $89.5 million compared to the same period last year.

Day remains optimistic. He says earnings per share will range between $1.00 and $1.20 during 2007, compared to the 54 cents per share earned in 2006. "I look forward to 2007, as we continue our focus on improving our core operations in all facets of our company."

Robert Berner contributed to this report

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