RadioShack 2008: Into the Margin Decline

3/7 - "We continue to believe that RSH margins will fall starting in 2Q 2008. The 2007 margin expansion story played out, and 4Q was no exception. However, gross margin dollars continue to fall and the company will cycle SG&A cuts after 1Q08...FCF improved in 2007 to $300mn; we don’t think this is sustainable. We expect FCF to fall back to $200mn...Capex fell to $45mn in 2007, the lowest level since at least 1985. We have argued this is not sustainable and management appears to agree. Capex will double in 2008 to $80mn-$100mn."

"Our thesis remains that RSH is a decaying business model where the higher service model in wireless activation is less and less needed...We struggle to see how gross margin $s grow in ‘08 with the sales mix shifting to lower-margin products like GPS and gaming...We reiterate our Underweight rating. Radio Shack is no longer the short of 2Q07. But the slow drip in the share price toward $15 remains realistic."