RadioShack Corp. posted a surprising drop in quarterly gross margin due to weakness in its electronics accessory business and more demand for lower margin mobile handsets, and its shares fell nearly 8 percent.
The U.S. electronics retailer also said its margin would remain under pressure as it works to improve its assortment in the accessories section and invests in wireless kiosks inside Target stores.
RadioShack's gross margin in the quarter fell to 45.4 percent from 47.6 percent, missing an average forecast of 48 percent, Oppenheimer's Brian Nagel said in a note. That also compares with margin increases of 140 basis points in the second quarter and 50 basis points in the first quarter.
Strong sales of smartphones like Apple's newest iPhone did help the company beat analysts’ expectations, but the market for that business is highly competitive, with retailers from Wal-Mart Stores Inc. to Best Buy Co Inc to wireless companies themselves battling it out.
"The only part of their business that is growing is wireless, which is a wonderful thing as long as there is no competition," Wedbush analyst Michael Pachter said, but added: "Best Buy has made it very clear they want to own this category."
RadioShack has sought to counter weak demand for converter boxes, antennas and other accessories by selling wireless devices and calling plans.
RadioShack shares, which had risen about 47 percent over the past year as the company looked at putting itself up for sale, were down 7.8 percent on Monday at $21.02.
The company, which has a market value of about $2.7 billion, has drawn interest from several buyout firms ranging from Blackstone Group and TPG Capital to Bain Capital to Advent International, but no deal has been reached.
Pachter said he had never considered RadioShack an attractive buyout candidate because of its high valuation and dim growth prospects for its core business.
"A private equity firm that buys them is a fool," he said.
Besides Best Buy, RadioShack faces stiff competition from online retailers like Amazon.com and some carriers that sell phones directly to consumers.
RadioShack's third-quarter net income rose 23 percent to $46 million, or 37 cents a share, from $37.4 million, or 30 cents a share, a year earlier.
Analysts on average were expecting a profit of 35 cents a share, according to Thomson Reuters I/B/E/S.
NOT COOL ENOUGH?
RadioShack, which has been trying to rebrand itself as "The Shack," runs about 4,680 company-operated stores in the United States and Mexico, more than 940 wireless phone kiosks in the United States, and about 1,240 dealer outlets worldwide.
While Pachter likes RadioShack's "ubiquitous" presence in the United States, he thinks the company has not done enough to rebrand itself as a destination for mobile phones or to cater to younger customers.
The company's shift in focus to mobile phones could mean it's time for a name change.
"I still think it's my grandmother's store. I don't think it is hip and cool for young people to go to," Pachter said.
He has an "underperform" rating on RadioShack and a "neutral" on Best Buy and added that he did not think of consumer electronics as a great sector to invest in.
"I don't think it's a growth industry at all."
In the quarter, RadioShack's sales rose 6.2 percent to $1.05 billion, while analysts expected $1.04 billion. Sales at company-operated stores and kiosks open at least a year also rose 6.2 percent.
The company has benefited from adding T-Mobile as a postpaid wireless carrier and the recent roll-out of wireless kiosks inside Target stores. It revenue outside the United States rose from sales at independent dealers and company-operated stores in Mexico.
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