RadioShack Corp disconnected an unprofitable wireless partnership with T-Mobile and replaced it with much bigger Verizon Wireless, sending shares of the U.S. consumer electronics chain up 19 percent.
The news, which overshadowed weaker-than-expected results from the retailer on Tuesday, came less than six months after RadioShack alleged that Deutsche Telekom AG's T-Mobile USA unit had "materially breached" their contract. The retailer has also said T-Mobile's product offerings were not competitive with those of other carriers.
The retailer did not shed light on how T-Mobile violated the contract, but indicated that pulling the plug on that partnership was a simpler, faster and cheaper solution to the problem than a costly legal battle with T-Mobile.
RadioShack said Verizon Wireless, a joint venture of Verizon Communications Inc and Vodafone Group Plc, would provide postpaid and prepaid wireless products and services in more than 4,300 RadioShack U.S. stores starting September 15.
Verizon Wireless is the No. 1 U.S. mobile provider.
"That is actually a pretty big deal," Wedbush analyst Michael Pachter said. "Verizon is a pretty big partner. T-Mobile was a pretty small partner."
Verizon is "three times as big" as T-Mobile, Pachter said. adding that Verizon's larger customer base would be a boon to the retailer, which has been struggling with weak sales despite its "ubiquitous" presence in the United States.
Other industry watchers agreed.
"This trades the weak for the strong," Janney Capital Markets analyst David Strasser said.
The underperformance of T-Mobile has been a significant drag on RadioShack's business since the fourth quarter of last year and has continued into the first and second quarters of this year, Chief Executive Officer Jim Gooch acknowledged on Tuesday.
"While it is difficult to predict the pace of improvement we will see in our business as we add Verizon Wireless to our offerings, we are comfortable with the range of analysts' earnings estimates for the remainder of 2011," Gooch said.
RadioShack's partnership with T-Mobile had been a cause of worry for analysts.
"RadioShack gave up a lot of compensation from AT&T (Inc) and Sprint (Nextel Corp) to carry T-Mobile, and this partnership doesn't appear to be panning out the way management expected," RBC Capital Markets analyst Scot Ciccarelli said in April.
Meanwhile, T-Mobile said it was all set to partner with another key retailer soon.
"We are currently focused on higher-return national retailer opportunities and we expect to announce new channel growth in the coming weeks, which will be more than double the number of RadioShack doors currently offering T-Mobile products and services," Hernan Daguerre, T-Mobile director of communications, said in an e-mailed statement.
RadioShack's quarterly profit dropped after weak consumer demand and cutthroat competition forced it to offer more margin-sapping discounts.
Net income fell to $24.9 million, or 24 cents a share, in the second quarter, from $53.0 million, or 41 cents a share, a year earlier.
Sales at the company, which was recently dropped from the Standard & Poor's 500 Index, fell to $941.9 million from $962.3 million in the year-ago period.
Excluding items, RadioShack earned 31 cents a share in the quarter. On that basis, analysts on average were expecting a profit of 37 cents a share, on sales of $1.03 billion according to Thomson Reuters I/B/E/S.
The retailer has sought to counter weak demand for converter boxes, antennas and other accessories by selling wireless devices and calling plans.
Wedbush's Pachter, who has a "neutral" rating and $14 target on RadioShack's shares, was optimistic about the deal with Verizon, but said the company has still not done enough to rebrand itself as a destination for mobile phones or to cater to younger customers.
In afternoon New York Stock Exchange trading, RadioShack shares were up $2.51 or 19.2 percent to $15.60.