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On Tuesday morning, RadioShack (NYSE: RSHCQ ) posted yet another quarter of glum earnings results. Comparable-store sales dropped by 7% due to declines in consumer electronics and mobility (two of RadioShack's three product groups). Pre-tax income of $3 million in the fourth quarter was significantly below fourth-quarter 2011 pre-tax income of $18 million, and unimpressive for what is usually a seasonally strong quarter.
For the full year, RadioShack lost $139 million; excluding taxes, the loss was $114 million. While RadioShack has a relatively strong balance sheet and trades below book value, the company has been destroying value at an alarming rate. RadioShack has hired a new CEO, but we don't know yet whether he will be able to craft a new strategy that turns RadioShack's business around. Until RadioShack shows some positive momentum, investors should steer clear of this value trap.
Cutting losses -- but not fast enough
On the earnings conference call, CFO Dorvin Lively noted that weak trends have continued into the current quarter, and he projected that RadioShack will see more earnings pressure in the first half of 2013. RadioShack has particularly suffered over the past two years from a deterioration in wireless gross margin. While the effects of that deterioration started to level off in the fourth quarter, management expects sequential margin erosion this quarter.
To combat the poor profitability of the wireless business, RadioShack recently announced that it is exiting its partnership with Target (NYSE: TGT ) effective April 8. Since 2009, RadioShack has operated "Target Mobile" kiosks inside Target stores to sell postpaid phones and wireless contracts. This business was supposed to boost RadioShack's growth, but was consistently unprofitable.
The Target Mobile division lost $37.5 million in 2012, so exiting this business should improve RadioShack's financial position. However, that represents only about one-third of RadioShack's total pre-tax loss of $114 million, so the company will need significant improvements elsewhere to return to profitability. An additional worrisome prospect is that inventories grew by $164 million in 2012, despite declining sales. The loss of Target Mobile sales may make it hard to move RadioShack's current inventory without resorting to discounts that further pressure gross margin in 2013.
Book value: A moving target
For value investors, the attractive thing about RadioShack is that it is trading significantly below tangible book value of $562 million ($5.61 per share). However, it is worth noting that book value dropped by more than $150 million in 2012 alone. With more losses projected for the next few quarters, RadioShack's book value is quickly being eaten up by operating losses. As a result, book value does not provide RadioShack shareholders much of a safety net.
It is possible that new CEO Joseph Magnacca can turn the RadioShack business around. However, until he creates a turnaround plan and demonstrates its promise, the risks to owning RadioShack appear to be greater than the rewards.
To make a well-informed prediction on whether this 80-year-old electronics brand can once again become regularly profitable, investors need a 360-degree analysis of the company. If you're curious to learn more, take a look at our recent in-depth premium report covering all the opportunities, risks, and specifics that every investor should be aware of before deciding whether RadioShack is a buy or a sell. Simply click here now to claim your copy and start reading today.