December 31, 2014 RadioShack Corp. NEUTRAL Current Recommendation Prior Recommendation Underperform Date of Last Change 09/18/2014 Current Price (12/30/14) $0.39 Target Price $0.50 (RSH-NYSE) SUMMARY In recent times, RadioShack has redesigned its retail website with new deals in the offing, in an effort to ramp up sales. However, despite such efforts, the company s shares have tumbled more than 50% over the last one month. Nowadays, consumers prefer making online purchases to visiting retail stores. As a result, RadioShack s core Consumer Electronics retail business has been on a secular downtrend. RadioShack is also facing a cash deficit situation and may file for bankruptcy if it fails to improve its cash balance. RadioShack reported dismal financial numbers for the third quarter of fiscal 2015. Both the top and the bottom line significantly missed the Zacks Consensus Estimate. We maintain our Neutral recommendation on RadioShack. SUMMARY DATA 52-Week High $2.72 52-Week Low $0.32 One-Year Return (%) -85.04 Beta 1.59 Average Daily Volume (sh) 2,840,309 Shares Outstanding (mil) 101 Market Capitalization ($mil) $39 Short Interest Ratio (days) 9.49 Institutional Ownership (%) 38 Insider Ownership (%) 3 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) -6.7 Earnings Per Share (%) -27.9 Dividend (%) 9.1 using TTM EPS using 2015 Estimate using 2016 Estimate Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * High Type of Stock Industry Retail-Cons Elc Zacks Industry Rank * 241 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 849 A 898 A 1,000 A 1,296 A 4,258 A 2014 849 A 845 A 805 A 935 A 3,434 A 2015 737 A 674 A 650 A 862 E 2,922 E 2016 2,877 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 -$0.08 A -$0.21 A -$0.33 A $0.04 A -$0.58 A 2014 -$0.35 A -$0.53 A -$1.09 A -$1.29 A -$3.26 A 2015 -$0.98 A -$1.00 A -$1.23 A -$0.93 E -$4.06 E 2016 -$0.89 E -$0.92 E -$0.76 E -$1.17 E -$3.74 E Projected EPS Growth - Next 5 Years % 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Headquartered in Fort Worth, TX, RadioShack Corp. (RSH) is one of the leading consumer electronics specialty retailers in the U.S., offering innovative products and services from leading brands. The company has operations in Mexico also. RadioShack s products include wireless telephones and communication devices, such as scanners and global positioning satellite navigation units; flat panel televisions, residential telephones, DVD players, computers, and direct-to-home (DTH) satellite systems; home entertainment, wireless, imaging, and computer accessories; general and special purpose batteries; wire, cable, and connectivity products; and digital cameras, radio-controlled cars and other toys, satellite radios, and memory players. The company also provides consumers access to third-party services, such as wireless telephone and DTH satellite activation, satellite radio service, prepaid wireless airtime, and extended service plans. RadioShack operates in two reportable segments as follows: Company Operated Stores: This segment consists of 4,463 company-operated retail stores in the U.S., all operating under the RadioShack brand name. The company-operated stores sell various wireless products, electronic accessories, power accessories, residential telephones, VoIP products, home audio and video end products, direct-to-home satellite systems, and computers. Other: This segment consists of business activities that are not separately reportable, which include RadioShack s kiosk sales and sales from worldwide dealer network, e-commerce, third-party service centers, manufacturing and foreign operations. REASONS TO BUY On Sep 11, 2014, RadioShack stated that it is in talks with its bondholder, lenders, shareholders and landlords to make a possible arrangement for capital in order to avoid bankruptcy. It is also considering options like a sale of the company, a near-term recapitalization or debt restructuring. Recently, Wall Street Journal reported that RadioShack is assessing a $585 million financing package in order to save itself from bankruptcy. UBS will organize $325 million, whereas Standard General will give $260 million, which will substitute the $585 million loan and credit facility from GE Capital, a part of General Electric Company (GE). Standard General and UBS do not plan to shut down any of RadioShack s stores. Rather, they will reportedly bolster the pace of renovations sought by the beleaguered company. RadioShack has recently taken several steps to boost the company s sagging morale. The company has introduced several promotional activities in order to drive store sales. RadioShack will be offering a $50 discount for in-store Samsung Galaxy S5 pre-orders. In addition, the customers will get a concession of $75 $300 in the company s Trade and Save program. The company formed a partnership with Beats By Dre, installed new display areas within the store dedicated to wearable digital fitness technology, established a new do-it-yourself product line partnership with Maker Media, and a five-year agreement with NACSCORP to offer consumer electronics and accessories to nearly 4,000 college stores. RadioShack has opened five concept stores in popular cities and intends to establish 100 such stores and renovate 2,000 stores across its footprints by the end of 2014. RadioShack launched two fresh concept stores in China and Malaysia. The company also plans to expand its presence in the Asian market by opening stores in the upcoming years. The company, along with its franchise partner Berjaya Retail Berhadre, launched an entirely modernized store in Equity Research RSH Page 2
Kuala Lumpur, Malaysia. Opening of such stores will not only enhance product display potential but will also increase footfall. The company expanded its AUVIO line of music accessories with a dozen new speakers, headphones and a wireless receiver. REASONS TO SELL Consumers nowadays prefer purchasing online to visiting retail stores. Declining foot traffic has severely affected RadioShack s business. Moreover, most consumers prefer tablets and smartphones, which are less profitable for the retail industry. The core retail businesses of RadioShack, particularly, the consumer electronics (including digital TVs, digital music players, and digital cameras) platform, continues its free fall. Moreover, comparable store sales for the companyoperated stores and kiosks (stores and kiosks that have been operational for at least a year) were down 16.9% in the reported quarter. RadioShack is facing intense competition from larger rivals like Best Buy and Wal-Mart. Best Buy is gradually rolling out small mobile stores. Best Buy plans to open 600 to 800 stores within 5 years, which in turn, will negatively impact RadioShack s market share. These stores are mainly located in shopping malls, where RadioShack traditionally operates. Additionally, Wal-Mart tied up with TracFone for a low-price pre-paid wireless service, raising its mobile phone sales activities. RadioShack is also facing stiff competition from online retailer, Amazon.com. In the third quarter of fiscal 2015, total revenue of RadioShack came in at $650.2 million, down 16.1% year over year. Quarterly gross profit came in at $214.2 million, down 11.2% year over year. Gross margin stood at 32.9% compared with 31.1% in the comparable year-ago quarter. A major near-term concern for the company is the significant decline in its gross margin. This was mainly due to an unfavorable sales mix of lower-margin smartphones and other mobile devices. Importantly, RadioShack announced that this trend will continue in the near future due to the revamping of the core retail electronics segment. We believe RadioShack, having lost its market leadership as a highmargin device retailer, is eventually emerging as a low-cost, low-margin device supplier. All the three major credit rating agencies, namely, the S&P, Moody s, and Fitch recently downgraded RadioShack with negative outlooks. The S&P has recently downgraded RadioShack s corporate credit and senior unsecured debt ratings to CCC from CCC+. The outlook remains negative. Moody s slashed RadioShack s corporate family rating to B3 from B1. Moreover, Fitch Ratings has downgraded the company s long-term Issuer Default Rating to CCC from B-. RadioShack consumed $242.9 million of cash for operations in the third quarter against cash flow generation of $249.9 million in the prior-year quarter. At the end of the quarter under review, RadioShack had $43.3 million in cash & cash equivalent compared with $296.6 million at the end of Oct 31, 2013. Long term debt, at the end of the reported quarter, stood at $841.4 million versus $613 million as of Feb 1, 2014. RECENT NEWS RadioShack Q3 Loss Wider than Expected, Revenues Miss Dec 11, 2014 RadioShack reported adjusted loss per share of $1.23 that widened from the prior-year quarter loss. Quarterly loss was also wider than the Zacks Consensus estimate of a loss of $1.07. GAAP net loss from continuing operations in the third quarter stood at $161.1 million or a loss of $1.58 per share compared with a net loss of $135.9 million or a loss of $1.35 per share in the year-ago period. Equity Research RSH Page 3
Meanwhile, total revenue came in at $650.2 million, down 16.1% year over year and considerably below the Zacks Consensus Estimate of $724 million. Notably, comparable store sales for company-operated stores and kiosks (stores and kiosks that have been operational for at least a year) were down 13.4% in the reported quarter mainly affected by traffic declines and slowdown in the mobility business. This is a key retail performance indicator measuring growth from existing sales locations. Quarterly gross profit came in at $214.2 million, down 11.2% year over year. Gross margin stood at 32.9% compared with 31.1% in the comparable year-ago quarter. Selling, general, and administrative expenses totaled $313.8 million against $352.8 million in the year-earlier quarter. Operating loss was $114.1 million compared with an operating loss of $128.6 million in the year-ago quarter. RadioShack consumed $242.9 million cash from operations in the third quarter against cash flow generation of $249.9 million in the prior-year quarter. At the end of the quarter under review, RadioShack had $43.3 million in cash & cash equivalent compared with $296.6 million at the end of Oct 31, 2013. Long term debt, at the end of the reported quarter, stood at $841.4 million versus $613 million as of Feb 1, 2014. Despite several attempts to turn around business over the last 18 months, RadioShack has not seen much success. RadioShack s core consumer electronics (including digital TVs, digital music players, and digital cameras) retail business has been on a secular downtrend and is quite unlikely to recover in the near future. Loss of foot traffic is also taking a toll on RadioShack s mobility business a platform on which the company had been banking for future growth. VALUATION RadioShack is currently incurring losses and therefore it is not possible to value the stock on a multiple basis. RadioShack is facing severe margin pressure, which is likely to continue during 2015. In recent times, RadioShack has redesigned its retail website with new deals in the offing, in an effort to ramp up sales. RadioShack is also facing a cash deficit situation and may file for bankruptcy if the company fails to improve its cash balance. We, thus, maintain our long term Neutral recommendation on RadioShack with a target price of $0.50, based on 0.8x P/B. Equity Research RSH Page 4
Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low RADIOSHACK CORP (RSH) 13.9 6.8 Industry Average 13.1 10.9 14.1 12.4 45.4 64.8 6.6 S&P 500 17.8 16.7 10.7 16.1 19.2 19.6 12.0 SYSTEMAX INC (SYX) 46.0 170.9 191.2 8.5 GAMESTOP CORP (GME) 9.6 8.0 14.6 7.4 10.3 16.7 5.7 AARONS INC (AAN) 18.7 14.3 14.8 2.9 19.5 22.3 9.7 HHGREGG INC (HGG) 12.0 4.8 120.1 6.4 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA RADIOSHACK CORP (RSH) 2.2 2.8 0.3-289.0-4.5 0.0-3.1 Industry Average 1.6 1.6 1.6-29.7-0.3 0.6-39.2 S&P 500 7.2 9.8 3.2 23.3 1.9 Equity Research RSH Page 5
Earnings Surprise and Estimate Revision History Equity Research RSH Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of RSH. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1141 companies covered: Outperform - 15.6%, Neutral - 78.4%, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research RSH Page 7