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RadioShack's a Big Fat Mess

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If you drew RadioShack (NYSE: RSH  ) in your corporate death pool, hold on to that ticket tightly. The small-box retailer had some grim news yesterday that's pushing the chain closer to obsolescence.

RadioShack isn't going away anytime soon. The company's still flush with cash. Its credit facility remains largely untapped. We're still looking at a profitable model. However, there are signs that RadioShack's contracting margins are here to stay -- and that should give any investor pause.

The retailer's stock is taking a beating today after posting problematic preliminary fourth-quarter results. Net sales climbed 6% to $1.39 billion, fueled by a 2% increase in comps and the expansion of its mobile centers inside Target (NYSE: TGT  ) stores.

That's not too shabby. The market was actually expecting a decline, which is somewhat surprising since it replaced T-Mobile with the larger Verizon (NYSE: VZ  ) to offer connectivity through all three major wireless carriers.

However, it's the path down to the bottom line where RadioShack's really sending off warning bells. Gross margins took a beating -- down from 41% to 35% -- as the company's revenue mix is shifting to lower margin tablets, e-readers, and select smartphones (hint, hint -- iPhones).

It makes sense since e-readers and entry-level Wi-Fi tablets aren't tethered to chunky data plans.

Apple's (Nasdaq: AAPL  ) move to sell through all three carriers as Verizon and Sprint (NYSE: S  ) came aboard last year was great for Apple. It hasn't been so good for the carriers and retailers that could be selling higher-margin Android devices instead.

This is it, folks. This is RadioShack's future. Traditional consumer electronics sales fell 30% at RadioShack. It's all about mobile phones and related accessories now.

RadioShack is in preservation mode now. It's not touching the dividend rate that it recently raised, but it's putting an end to share repurchases for now. It's just as well. RadioShack spent an average of nearly $12.80 a share to buy back 930,000 shares during the holiday quarter, a move that seems silly as its stock dips into the single digits. The irony that RadioShack isn't buying now when it makes sense should tell you everything you need to know about the company's uncertainty as to when these shrinking margins will improve.

The unflattering revenue mix and weakness through its Sprint offerings leave RadioShack targeting a profit of $0.11 a share to $0.13 a share for the quarter that ended a few weeks ago. RadioShack had earned $0.51 a share a year earlier. Analysts were holding out for a profit of $0.37 a share.

Income investors will help limit the stock's downside in the near term. Last night's after-hours thrashing pushes the yield above 5%, and that's awfully tempting. Unfortunately, we've gone from RadioShack cutting dividend checks with a comfortable payout ratio to one where it may soon have to eat into its balance sheet if earnings don't improve.

Buy into the fat dividend at your own risk. 

If RadioShack's yield can't be trusted, where does an income investor turn? A new report explains how to secure a financial future with 11 rock-solid dividend stocks. It's free, but it won't be around forever. Check it out now.

The Motley Fool owns shares of Apple and RadioShack. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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