NEW YORK (Reuters) - Consumer electronics chain RadioShack Corp RSH.N reported an unexpected second-quarter loss on Wednesday as its bet on the smartphone business brought more customers into the store but cut into margins.
The company also suspended its dividend as it plans to refinance and pay down debt.
The news dragged its shares down nearly 30 percent to their lowest-ever level, and raised new concerns about the future of the retailer, which recently lost its merchandising chief as it gears up for the all-important holiday season.
"They are kind of caught between a rock and a hard place," said BB&T Capital Markets analyst Anthony Chukumba. "They have hitched their wagons to wireless and it looks like that was not necessarily the right bet. Having said that, I am not sure what else they could have done."
The dismal results also prompted ratings agency Fitch to downgrade RadioShack's long-term debt rating to "junk" status.
Consolidated gross profit in the second quarter was $360.3 million, well below last year's $432.1 million.
The margin pressure will continue in the current quarter as well, CEO Jim Gooch said on a conference call.
RadioShack has been increasingly focusing on selling more calling plans and smartphones, particularly the Apple Inc (AAPL.O) iPhone. On Wednesday, The retailer said it will carry the next version of the iPhone as well, whenever it is launched.
Profit margin on iPhones is significantly less than on mobile devices that use the Android operating system, analysts and other industry-watchers have told Reuters.
Unlike in the past, most of RadioShack's major wireless partners -- Sprint Nextel Corp (S.N), Verizon Communications Inc (VZ.N) (VOD.L) and AT&T Inc (T.N) -- are now pushing the more heavily subsidized iPhone.
While industry-watchers expected the trends to pressure profit, many were taken aback by the extent to which they squeezed margins.
"I don't think anyone thought it will put this much pressure on profit margins," Chukumba said.
RadioShack's net loss was $21 million, or 21 cents a share in the second quarter compared with net income of $24.9 million or 24 cents a share, a year earlier.
Analysts, on average, were looking for a profit of 3 cents a share, according to Thomson Reuters I/B/E/S.
Sales rose about 1.2 percent to $953.2 million, but missed the average estimate of $970.4 million.
RadioShack's shares were down 29 percent at $2.59 at midday on Wednesday, just 2 cents off the day's low.
Earlier this week, UBS downgraded RadioShack to "sell" from "neutral," saying questions about its strategic direction, vacancies in key executive positions, and an uncertain capital outlook would weigh on the stock.
Some on Wall Street had expected RadioShack to suspend its dividend, considering cash needs that include $375 million in long-term debt coming due in August 2013.
Gooch, the CEO, said the decision to suspend its dividend stemmed from the retailer's plan to refinance about one-half of this debt in the coming months, with the balance paid down with excess cash.
Despite the suspension of the dividend, Chukumba said RadioShack's liquidity was still "pretty decent."
"They still for the most part have time on their side," Chukumba said.
Gooch also tried to reassure investors.
"Our financial position and balance sheet are strong, our liquidity exceeds $900 million, and year-to-date we generated positive operating cash flow," he said in a statement.
As of June 30, RadioShack had about $680 million of debt outstanding, Fitch said.
Reporting by Dhanya Skariachan; Editing by Maureen Bavdek, Jeffrey Benkoe and Matthew Lewis