Shareholder Suit Accuses RadioShack of Misleading Investors

The changes in strategy came at the expense of reducing focus on the “historical high-margin” CE and accessories business and moving to wring a profit by trying to sell more low-margin wireless products, said a suit filed by Steven Weissmann in U.S. District Court, New York. Earlier this month, Shareholder Thanh Le was named lead plaintiff in the case, which applies to shareholders who bought RadioShack stock between July 26, 2011, and July 24, 2012.

RadioShack knew that a higher percentage of wireless products sales at the expense of CE and accessories, wouldn’t lead to net income growth because of the “lower margins and higher costs associated with obtaining those sales,” the suit said. RadioShack officials weren’t available for comment on the suit.

RadioShack pinned improving profit and sales on returning Verizon last fall to its merchandise, displacing T-Mobile. RadioShack also rapidly deployed wireless kiosks at Target under the Bullseye brand, but has largely been limited to selling less profitable phones and a small portion of accessories. “As a result of false and misleading statements, and failures to disclose, RadioShack’s common stock traded at artificially inflated prices during the class period,” the suit said.

While RadioShack executives forecast quarterly improvements in net income in 2012, it knew profit margins would continue to decline amid increased sales of smartphones, the suit said. Smartphones are less profitable than so-called feature phones, the suit said. The flaws in RadioShack’s new strategy came to a head in July when the chain posted a $21 million Q2 net loss amid weak mobility sales and eroding margins that caused the company to suspend a planned dividend, the suit said. That was followed by CEO James Gooch leaving in September and RadioShack threatening to stop operating Target’s Bullseye kiosks by April unless a more profitable agreement could be reached (CED Oct 24 p3). RadioShack reported a $25.4 million Q3 loss on the 1,512 Bullseye kiosks, more than three times the $7.3 million loss it recorded a year ago on 1,490 locations. RadioShack blamed the kiosk business for a decline in Q3 gross margin to 36 percent from 42.8 percent a year earlier, below analyst estimates of 38 percent. It also blamed a shift in sales to lower-margin smartphones, including the iPhone, which has a higher retail cost.

In a bid improve profitability, RadioShack has increased its assortment of headphones 60 percent since last year to nearly 200 SKUs, a RadioShack spokesman said in a separate interview last week. The chain also has added five new displays for wireless accessories, he said. RadioShack also has deployed 2,600 full- and part-time wireless “consultants” across 700 locations to help in selling mobile services, the spokesman said. Each of the stores has three to four consultants, the spokesman said. Many of the new consultants came from within RadioShack stores, but others were new hires, he said. RadioShack’s $11.7 million Q3 asset impairment charge for the Target business largely consisted of shelves and wireless display units that had “reached the end of their useful lifecycle,” the spokesman said. RadioShack also took a $1.8 million charge in Q3 for fixtures, signs and leasehold improvements for stores that are closing and being relocated, the spokesman said. The 150 workers laid off at RadioShack’s Fort Worth, Texas, headquarters in September were from “nearly all levels and functions of the home office” including IT, human resources and finance, he said.