Radio Shack announced strong third-quarter results today, on the heels of a warning from competitor Circuit City. Does the news from Circuit City spell doom for the industry? Not even.
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Radio Shack's results
Good news first -- Radio Shack (NYSE: RSH) announced third-quarter earnings this morning. The retailer saw net income grow to $77.1 million for the quarter, up from $59.8 million last year. Radio Shack beat earnings estimates by a penny, with $0.39 a share, compared to $0.29 last year. Sales for the quarter increased to $1.14 billion, versus $960.3 million in the year-ago quarter. Digital items, like wireless phones, helped fuel Radio Shack's sales.
Circuit City's warning
On the flip side, Circuit City Stores (NYSE: CC) warned the Street Friday that its third quarter will return disappointing results. The company, which announced in late July that it is exiting the appliance business and is also going through a major three-year remodeling of all its stores, cited slow sales across "virtually all product categories." Circuit City had expected some impact on its sales as a result of all the remodeling, but the actual drop-off surprised it.
Because of the slow sales, Circuit City now expects to post a loss in its third quarter of between $0.05 and $0.10 a share. Included in this loss are costs associated with exiting the appliance business and remodeling stores. Analysts were looking for a profit of $0.16 a share. Circuit City earned $0.27 a year earlier in the third quarter.
Company or sector?
Why is one company within this sector performing while another stumbles? Is it company-specific, or should we be on the lookout for others, such as Best Buy (NYSE: BBY) to fall ill as Circuit City did?
While there is some evidence that consumer spending is slowing, and may continue to do so into the important holiday shopping season, Circuit City's problems are more the result of its own actions and its competitors' superiority. The company's extensive remodeling is keeping customers away. They're shopping elsewhere, obviously -- probably, in many cases, Best Buy, Radio Shack, or at discounters that carry electronics goods like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT).
The competition is putting a hurt on Circuit City in various ways. Best Buy is siphoning away customers by expanding into large metropolitan areas, having just opened a store in New York City, for instance. Radio Shack has kept its focus tight, never branching out into appliances like Circuit City did.
Radio Shack also has profitable agreements with other companies that allows them to sell within its stores, through its "store-within-a-store" concept -- most notably Compaq Computer (NYSE: CPQ), Microsoft (Nasdaq: MSFT) and the just-announced deal with Excite@Home (Nasdaq: ATHM). Additionally, Radio Shack gets recurring revenue from things like wireless phone and satellite television services.
Circuit City's warning on Friday sent other stocks down within the sector. Radio Shack's results today, though, should instill some confidence in investors that it isn't the sector that's having severe troubles -- it's Circuit City. (Last month, as well, Best Buy reported strong results.)
From all the evidence we have now, it appears that Circuit City's problems are endemic to it. It's no surprise that Circuit City is feeling some pain -- and will likely continue to do so -- given its vast restructuring. Investors should be careful about stretching Circuit City's warning over other companies in the sector.
Your Turn:
How long do you think it'll take Circuit City to recover? What do you think about Radio Shack selling Excite@Home cable broadband services? Did the company's earnings impress you? Talk about it all on the Circuit City and Radio Shack discussion boards.
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