Kenneth Li

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Sprint PCS Takes RadioShack News on Chin

Kenneth Li

RadioShack's(RSH Quote - Cramer on RSH - Stock Picks) earnings shortfall was shrugged off Friday morning by investors who found solace in the company's confident long-term forecasts.

Not so investors in Sprint PCS(PCS Quote - Cramer on PCS - Stock Picks), which by some estimates gets a quarter of its new business from RadioShack outlets.

While RadioShack was showing a modest gain at midday, Sprint PCS was tanking after weak sales of the company's cell phones and service contracts were cited in the electronics retailer's earnings warning. PCS shares were recently down 32 cents, or 7%, at $4.47.

Fort Worth, Texas-based RadioShack said it expects to earn 58 cents to 60 cents a share in the quarter, slightly below the 65 cents a share that analysts were predicting. The company said sales rose in each month of the quarter compared with a year ago, but not as much as it had hoped. RadioShack didn't provide a specific revenue estimate; analysts on average were expecting about $1.47 billion, according to First Call. The company also cited margin pressure beginning in November.

The warning is the latest in a steady drumbeat of bad news in the retail sector, amid one of the worst holiday shopping seasons in years. Electronics superstore Best Buy(BBY Quote - Cramer on BBY - Stock Picks) also warned in December of sales shortfalls for the crucial fourth quarter.

RadioShack singled out Sprint PCS products in explaining the sales shortfall, along with radio-controlled toys and DVD accessories. Although Sprint PCS does not provide percentage of sales derived through outside retailers, analysts said the chain is the wireless carrier's most significant channel outside of its own retail locations and Web storefront. Some analysts estimate that about 25% of Sprint PCS's customer additions come from RadioShack.

RadioShack also sells phones and services from the nation's largest carrier, Verizon Wireless(VZ Quote - Cramer on VZ - Stock Picks), but made no mention of that company in its earnings preannouncement.

Kaufman Brothers telecom analyst Vik Grover said today's news was not an indication of an overall weak wireless market but was specific to Sprint. "The wireless [sector] does not have an issue," said Grover, who slapped a sell rating on the stock. But Sprint PCS "faces their own special issues."

Sprint PCS recently reinstituted a $125 deposit requirement for credit-strapped customers as a way to pare down bad debts from deadbeat customers. RadioShack executives said on a morning conference call that the deposit, combined with Sprint's own stiffer credit-screening process, lengthened the new subscriber activation process, which eventually hurt sales.

Beyond that, Kaufman's Grover said, consumers may not be drawn to Sprint's recently launched high-speed wireless data network, which was expected to give the ailing carrier a strong sales lift in the fourth quarter. The new data network enables subscribers to download ringtones and video games and send and receive pictures and email. (Kaufman Brothers doesn't have an investment banking relationship with Sprint PCS.)

RadioShack's warning raises questions about whether Sprint PCS is in fact in recovery mode, as the wireless company predicted in mid-December. Sprint executives touted strong adoption of its new network at the time and raised their full-year 2002 earnings before interest, tax, depreciation and amortization by $100 million, to an expected $2.8 billion.

Despite Sprint's chest-thumping, the sales shortfall mentioned by RadioShack wasn't much of a surprise to wireless sector watchers, since Sprint PCS recently warned that fourth-quarter gross customer additions, or the amount of new customers before subtracting the number of customers who leave the service, wouldn't be as strong as it anticipated at the end of the third quarter.

"It's just a continuation of a long trend," said Morningstar analyst Todd Bernier. "The demographic they're going after is saturated and [is] not growing that greatly."

Looking ahead, RadioShack said it still expects earnings to rise 13% to 15% a year from 2003 to 2005 on 2% to 3% sales growth and expanding gross margins. Analysts polled by First Call are predicting earnings of $1.66 a share on sales of $4.6 billion in 2003.

RadioShack investors, who have expected the worst since the third quarter, focused on the company's long-term outlook. Meanwhile, Qualcomm(QCOM Quote - Cramer on QCOM - Stock Picks), which is responsible for some of the technology in Sprint PCS cellphones, also took collateral damage, dropping $1.09, or 2.93% to $36.05.