Investors Shellack the Shack Despite Income Gains

Adding the iPhone to its product mix helped Radio Shack lift its net income 23 percent in the third quarter, the company announced Monday. But falling margins and continued uncertainty about the venerable brand’s future left the market unimpressed.

Radio Shack reported diluted earnings per share of 37 US cents compared to 30 cents in the same period of 2009. The company reported total net sales of $1.05 billion for the quarter ended Sept. 30, compared to $990 million during the same stretch in 2009.

iPhone to the Rescue

The company’s rebranding and emphasis on adding upscale wireless options to its product mix helped drive the sales, according to Chairman and CEO Julian Day. The company launched a rebranding effort last year, adopting the informal nickname “The Shack” and increasingly shifting its focus to wireless sales as tools to refresh its aging image as an outlet for cables and do-it-yourself radio kits.

But a deeper look at the numbers shows that the company’s gross profit and margins failed to meet estimates, leading to an early-morning sell-off that left the company’s stock down more than 8 percent in mid-day trading.

“I think the biggest challenge for Radio Shack is relevancy,” said Scott Tilghman, an analyst with Hudson Square Research.

Trouble Ahead?

Radio Shack has missed out on much of the growth in consumer electronics because its stores are too small to carry the assortment of high-definition televisions, Blu-ray players, gaming consoles and computers that consumers want, Tilghman said.

Now, Best Buy is making a strong play for wireless customers — the heart and soul of Radio Shack’s new product mix, he said.

The iPhone likely contributed about half of the growth in wireless for Radio Shack, Tilghman stated, with the addition of T-Mobile and other wireless handsets together accounting for the rest.

Best Buy Threat

Best Buy carries phones from three major U.S. wireless brands and is likely to sell a Verizon-branded iPhone should that company beginning selling one early next year, as rampant speculation suggests will happen.

However, Radio Shack has said it is forbidden in its existing contracts with carriers to add Verizon to its mix, meaning the company may be looking at a smaller pool of potential customers for the phone that has helped boost its sales this year, Tilghman said.

“It has been increasingly difficult for Radio Shack to manage their business outside wireless,” he said. “At the same time you have Best Buy cutting into what has been their bread and butter. The growth rates in wireless we’ve seen this year do not seem sustainable.”

For that reason, Tilghman said he’s cautious at best about Radio Shack’s long-term prospects.

Private equity interests which had appeared to express some interest in acquiring the company seem to have backed off, and the company is nearing the end of a stock repurchase program that has offered some price support in recent months.

Radio Shack did not respond to a request for comment by deadline for this article.