NEW YORK – Electronics retailer RadioShack Corp. (RSH) reduced its full-year profit forecast on Friday as it works to end ties with mobile phone provider Verizon Wireless by year-end.
RadioShack, which has been plagued by worries over the health of its wireless business, also said third-quarter earnings, excluding a one-time gain, fell 25 percent.
"I think we're going to go through a major transition of wireless carriers in the fourth quarter," said Chief Executive David Edmondson in an interview.
"I think it's going to have some effect on the overall economics of the business for the fourth quarter and some of that will carry into the first quarter," he said.
RadioShack has been trying to shore up its wireless business, which accounts for more than a third of total sales. It has been losing customers to competition from outlets owned by the same wireless providers that sell products and service at 7,000 RadioShack stores.
In August, RadioShack announced new long-term wireless contracts with Sprint and Cingular Wireless, cutting ties with long-time ally Verizon Wireless, a joint venture operated by Verizon Communications (VZ) and Vodafone .
Edmondson said that the short-term bumps will lead to longer term gains.
"At the end of the day, what we're doing is positioning the business for next year and beyond," he said.
Shares in RadioShack slid more than 3 percent to $22.89 on the New York Stock Exchange (search).
The No. 3 U.S. electronics retailer reported net income of $108.5 million, or 75 cents per share, compared with net income of $69.7 million or 43 cents per share, a year before.
This year's results included a noncash gain of $56.5 million, or 39 cents per share, due to the reversal of a tax contingency reserve.
Analysts, on average, were expecting operating earnings of 37 cents per share, according to Reuters Estimates.
Total sales rose 8 percent to $1.19 billion, above Wall Street's average estimate of $1.15 billion.
"We are concerned about the quality of RSH's operating earnings -- the decline in gross margin and the disparity between earnings and cash flow," wrote CIBC World Markets analyst Dan Wewer in a note.
When RadioShack announced the new wireless contracts in August, it stuck by its 2005 profit per share view of $1.80 to $1.90.
On Friday said it was expecting full-year earnings per share of $2.14 to $2.24, including a 38 cent per share impact from the nonrecurring tax gain and other factors.
Edmondson said the new range was an effort to get the upside out of its previous outlook due to the wireless transition and uncertain consumer spending.
"You can expect more like $1.85 being the upside not $1.90," he said.
Analysts, on average, are expecting full-year earnings per share of $1.85, according to Reuters Estimates.
RadioShack now faces higher-than-usual inventory as it winds down its Verizon business and stocks its shelves with MP3 players, satellite radio and digital imaging products for the holidays.
"Our inventories are higher than we want them to be ... and we will continue to work aggressively to bring inventory levels down," CFO David Barnes said.
The company said its quarterly gross margin declined 300 basis points due to "an aggressive inventory clearance sale," and its third-quarter comparable store sales were up 1 percent.
Total wireless sales rose 15 percent after sales at its kiosks -- which numbered 743 at the end of the quarter compared to just 11 a year earlier -- offset a decline in wireless sales at its core stores during the quarter.
RadioShack expects 2005 free cash flow of about $80 million to $100 million, "lower than those projected earlier this year due primarily to new expectations for changes in inventory."
As of Thursday's close, RadioShack shares are down 28 percent year-to-date, compared with shares of Circuit City Stores Inc. , which are up nearly to 12 percent.