RadioShack Corporation (NYSE: RSH) shares fell more than ten percent on the day after the company posted a sharp drop in first quarter earnings. The electronics retailer reported that its profits fell 9 percent, hurt by weak results from its Sprint wireless partnership. Meanwhile, sales fell four percent but managed to come in ahead of expectations.
"We are pleased with the overall outcome for the first quarter of 2008, especially in light of the difficult economic environment. After a very challenging month of January, our sales and earnings trends improved significantly during February and March, resulting in an average comp store sales decrease of 1.2% for the two months," said Julian Day, Chairman and Chief Executive Officer.
The real driver that brought the stock down were bearish comments made by analysts. They noted that the company's lack of a sales pullback was impressive, but it came at a cost. Operating margins missed forecasts and declined for the first time in six quarters. Meanwhile, inventory growth outpaced cost-of-goods sold growth for the first time in eight quarters.
RadioShack has been working to effect a turnaround in recent months, having closed some 500 stores and trimmed other expenses. Analysts noted that these changes have resulted in better stores, but the items in these stories still suffer from lower gross margins and could prove to be a barrier to gross profit dollar growth.
In the end, RadioShack may not seem to be affected by the recession given its better-than-expected sales and earnings, but a quick look beneath the hood unveils continued problems with operating margins that are only exacerbated by issues with its Sprint partnership. Combined, these factors led to today's drop in shares.
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