NEW YORK Consumer electronics chain RadioShack Corp RSH.N reported an unexpected second-quarter loss as increased demand for lower-margin mobile handsets squeezed profits, and suspended its dividend.
The results dragged down shares by about 23 percent in premarket trading on Wednesday and raised fresh concerns about the future of the retailer, which recently lost its merchandising chief, months ahead of the all-important holiday season.
"They are kind of caught between a rock and a hard place," said BB&T Capital Markets analyst Anthony Chukumba. "They have hitched their wagons to wireless and it looks like that was not necessarily the right bet. Having said that, I am not sure what else they could have done."
Many were more stunned by the rate of decline in margins.
Consolidated gross profit was $360.3 million, well below last year's $432.1 million.
RadioShack has been increasingly focusing on selling more calling plans and smartphones, particularly the Apple (AAPL.O) iPhone. The move helped bring more people into its stores, but hurt margins.
Profit margin on iPhones are significantly less than a comparable Android device, analysts and other industry watchers have told Reuters.
And unlike in the past, most of RadioShack's major wireless partners -- Sprint (S.N), Verizon (VZ.N)(VOD.L) and AT&T (T.N) -- are now pushing the more heavily subsidized iPhone.
While industry watchers expected the trends to pressure profits, many were taken aback by the extent to which they squeezed margins.
"I don't think anyone thought it will put this much pressure on profit margins," said BB&T Capital Markets analyst Anthony Chukumba.
RadioShack's net loss was $21 million, or 21 cents a share in the second quarter, compared with net income of $24.9 million, or 24 cents a share, a year earlier.
Analysts, on average, were looking for a profit of 3 cents a share, according to Thomson Reuters I/B/E/S.
Sales rose about 1.2 percent to $953.2 million, but missed the average estimate of $970.4 million.
Chukumba advised investors to stay away from consumer electronics retailers as they were being hurt by a weak product cycle and strong competition from online retailers, and are forced to carry more margin-sapping Apple products to win shoppers.
Earlier this week, UBS downgraded RadioShack to "sell" from "neutral," saying questions about its strategic direction, vacancies in key executive positions, and an uncertain capital outlook would weigh on the stock.
Some on Wall Street expected RadioShack to suspend its dividend, considering cash needs that include $375 million in long-term debt coming due in August 2013.
Chief Executive Jim Gooch said the decision to suspend its dividend stemmed from the retailer's plan to refinance about one-half of this debt in the coming months, with the balance paid down with excess cash.
Barclays analyst Alan Rifkin recently said a significant cut, or even eliminating the dividend was "likely and prudent."
"From a longer-term perspective, we continue to be cautious on the company's operating structure," Rifkin had said.
Despite the suspension of the dividend, Chukumba said RadioShack's liquidity was still "pretty decent."
"They still for the most part have time on their side," Chukumba said.
Gooch also tried to reassure investors.
"Our financial position and balance sheet are strong, our liquidity exceeds $900 million, and year-to-date we generated positive operating cash flow," Gooch said in a statement.
(Reporting By Dhanya Skariachan; Editing by Maureen Bavdek and Jeffrey Benkoe)