RadioShack (NYSE:RSH) has done it again. The electronics retailer handily beat analysts' estimates for the third quarter. Despite the question many of us have asked -- when will the wireless party end? -- RadioShack continues keeping costs in a stranglehold and profiting from mobile products.
Third-quarter earnings at RadioShack increased 22% to $69.7 million, or $0.43 per diluted share. Same-store sales gained 5%, while total sales increased 4% to $1.1 billion. As has been the case for quite some time now, the real highlight of RadioShack's report was the strength in wireless communications products, with such sales up 19%. Computer goods sales increased 13%, related to imaging and networking products. However, sales in categories other than wireless decreased 5%.
RadioShack stood firm on its annual projections for 2004 and 2005, which likely disappointed some investors ahead of the holiday season. Although RadioShack did provide its cash flow statement with its release, you might notice the company's gone negative free cash flow in the first nine months of the year.
RadioShack management addressed this in its conference call, stating, "RadioShack was a user of cash through the first nine months of this year as opposed to a source of cash last year." The company linked this to higher percentages of inventory in stores. Free cash flow projections for the year were recently reduced to $30 million to $40 million, related to its Sam's Club deal.
Meanwhile, many (again, myself included) have questioned the company's wireless focus, wondering if go-go sales boosted by number portability and current technology are setting RadioShack investors up for a fall when the upgrade cycle slows and more people go for small-ticket widgets over big-ticket wireless.
Management defended the wireless emphasis in its call today, saying it's not "bad business" for RadioShack and arguing that certain age segments and the prepaid market are under-penetrated, while cameras, videos, text messaging, gaming, and other increased functionality will drive future sales and upgrades.
Furthermore, the company believes some new product launches will be of help in the fourth quarter, one of the notable mentions being Sirius Satellite Radio (NASDAQ:SIRI), which recently gained some cool points for having landed Howard Stern.
It's a lot of food for thought. It's certainly nice that RadioShack continues to squeeze out profits. And the company's got serious dreams, including new store formats that it plans to begin rolling out in 2005, and the idea that it can further push wireless growth through kiosk retail. However, it's not hard to see the risks at hand and the questions raised by conservative guidance; despite the optimistic arguments, caution may seem warranted for those eyeing shares in the Shack.
Alyce Lomax does not own shares of any of the companies mentioned.
