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Change the Channels on RadioShack

Sales are dismal, and the stock's run has made it too pricey.

It seems I'm the only one who's unimpressed with



first-quarter results.

Shares of the electronics retailer recently were jumping $1.95, or 7%, to $29.67 after the company posted

better-than-expected earnings. That adds to a big stock run in recent months as RadioShack works to turn around a series of dismal results.

Indeed, the company has slashed costs, improved margins and boosted its bottom line. But sales are still tanking, and that's not just because the retailer closed more than 500 stores. On a comparable-store basis, first-quarter sales plummeted 9.2% amid continued weakness in the company's wireless business.

This sales decline, as well as the stock's lofty levels, makes me wary.

I do applaud what RadioShack accomplished on an operational basis. Gross margin in the first quarter improved 370 basis points, and operating margin jumped 540 basis points to 7.5%.

Management said improved inventory control and product mix helped boost gross margin, while a decrease in payroll and advertising costs improved operating margin. CEO Julian Day and his team did a stellar job in that department.

RadioShack also managed its cash well in the quarter. Accounts receivables and inventories went down, while payables rose by nearly half the amount in the year-ago period. Without the repurchase of $45 million in stock, cash would have grown by $36.4 million.

It's admirable that management has gotten their hands around costs. But for now, sales stink. In fact, the recent period marked the first time since 1999 that RadioShack failed to log $1 billion in revenue in the first quarter.

With the better operational results, if RadioShack can actually get people to buy what they're selling, the bottom line could improve dramatically.

I usually like this kind of story -- one in which there is evidence of change -- but the rest of Wall Street is not on board. Only three analysts rate the stock a buy, while 12 have it at hold and seven recommend selling it.

Thus this should be a great contrarian pick. But there are two issues.

First, there's no reason to believe that the company's sales are about to turn around. There is nothing exciting in or about the stores to attract consumers.

TheStreet Recommends

The Onion


spoofed RadioShack's business model. And while no one will confuse the satirical analysis of

The Onion

with that of the fine writers and contributors of

, there is some truth behind the jokes.

The second major concern is valuation. Shares of RadioShack have surged a whopping 65% since the beginning of the year.

With the stock's additional 7% jump Monday, investors have to pay a premium to own this


turnaround story. RadioShack trades at 26 times forward earnings compared with just 15 times earnings at category leader

Best Buy

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and the industry average of 22.

The stock also trades at much higher multiples than its peers based on other metrics. The table below, which compares metrics I calculated using Thomson Financial data, shows just how expensive RadioShack is on a relative basis.

I can't think of a reason why this stock should be trading at a premium to Best Buy,


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, or any other retailer for that matter. Assigning a category average multiple across various metrics, I come up with a price target of $21.

Perhaps someday RadioShack's revenue skid will be over. But until then, do something that RadioShack can't: Sell.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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