Expecting RadioShack's Margins and Earnings to Fall, Reiterate Underweight - Gregory Melich (Morgan Stanley)

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Expecting RadioShack's Margins and Earnings to Fall, Reiterate Underweight
Apr 29, 2008 02:10 PM UTC

Gregory Melich (Morgan Stanley)

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Symbol	Sentiment	Start	Return	Closed
RSH		04/29/08	+68.51%	--

4/29 - "Excluding a $2.9mn tax credit, adjusted 1Q08 EPS was $0.28 vs. our $0.30 estimate. 1Q was the last quarter RSH will profit from (headquarter) cuts in 2007. We continue to believe 2007 margin expansion was a one-off, and margins and earnings will fall in 2008. We expect EPS to fall to $1.45 in 2008 when RSH anniversaries the cost reductions of 2007."

"Gross profit dollars decreased $32mn or 7% in Q1 on an adjusted basis vs. the reported GAAP decline of $46mn. The decrease was mostly due to aggressive pricing in an increasingly competitive environment and a continued mix shift toward lower margin products. As a result, operating margins decreased for the first time in six quarters. We expect continued margin deterioration throughout 2008."

"We estimate wireless sales were down mid-single digits excluding GPS. AT&T postpaid wireless sales were up, driven by upgrades, while Sprint wireless business was down. Next data point could be Sprint’s earnings report on May 12. Our telecom services analyst Simon Flannery expects 1Q Big 4 retail net adds to be down
approximately 47% y/y."

"We reiterate our Underweight rating. Pressures in the core wireless business (around 30% of revenues) continue, with Sprint problems adding to the decline. We continue to believe that FCF of $300mn is not sustainable. RSH reported a usage of $6.7mn of cash in 1Q08 compared to FCF of $37mn last year. Capex will at least double from 2007 to stabilize the business. RSH is no longer the short of 2Q07 but our bear case of $10 is still realistic if margins break back towards 2006 levels."

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