We are upgrading our recommendation on RadioShack Corp. (NYSE: RSH - News) to Neutral based on (1) its current valuation (2) launch of iPAD2 in its 500 stores from March 29, 2011. The stock price has plummeted nearly 37.5% in the last year and is now trading at the low-end of RadioShack’s 52-week price range. We believe current valuation of RadioShack may provide a cushion for a further downside.
The wireless category, which represents one-third of total sales, is likely to continue its impressive performance in near future. RadioShack generated increased revenue from Sprint Nextel and AT&T postpaid wireless business. The company now offers a broad range of products from AT&T (NYSE: T - News), Sprint Nextel Corp. (NYSE: S - News), and T-Mobile. RadioShack enriched its leading-edge wireless product portfolio by adding Apple Inc’s (NasdaqGS: AAPL - News) legendary smartphone iPhone 4.?
In a major strategic decision, RadioShack has decided to sell Apple’s iPAD 2 tablet from March 29, 2011. Initially, iPAD 2 will be available in 500 RadioShack stores. Apple’s iPAD2 is the most sought after tablets in the U.S. market. Like smartphone, the tablet market is growing rapidly and as of now, iPAD2 is the undisputed leader in this market. Rapidly growing mobile tablets have become next-generation choice taking over market share from laptops and personal computers. Tablets and smartphones are the two clear winners of the immensely competitive mobile gadget market. Both these products offer high margins. With iPAD2, RadioShack can now become a formidable player in the wireless devices segment.
Nevertheless, a major near-term concern for RadioShack is the significant decline of its gross margin. In the fourth quarter of 2010, gross margin was 41% compared with 43.9% in the prior-year quarter and 45.4% in the previous quarter. Management cited precipitous decline of electronics accessories business and an unfavorable product-mix toward low-margin mobile handsets are the primary reasons for this poor margin. Importantly, RadioShack announced that this trend will continue in near future due to revamping of the core retail electronics segment and large-scale deployment of wireless kiosks inside Target Corp. (NYSE: TGT - News) stores.
AT&T INC (T): Read the Full Research Report
SPRINT NEXTEL CORP (S): Read the Full Research Report
APPLE INC (AAPL): Read the Full Research Report
RADIOSHACK CORP (RSH): Read the Full Research Report
TARGET CORP (TGT): Read the Full Research Report
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