RadioShack Corp disconnected an unprofitable partnership with T-Mobile and replaced it with much bigger Verizon Wireless, sending shares of the U.S. consumer electronics chain up more than 18 percent on Tuesday.
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The decision came less than six months after RadioShack alleged that Deutsche Telekom AG's <DTEGn.DE> T-Mobile USA unit had "materially breached" their contract. The retailer also said T-Mobile's product offerings were not competitive with those of other carriers.
On Tuesday, RadioShack said Verizon Wireless, a joint venture of Verizon Communications Inc <VZ.N> and Vodafone Group Plc <VOD.L>, would provide postpaid and prepaid wireless products and services in more than 4,300 RadioShack U.S. company-operated stores starting Sept. 15.
"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: "If you, a customer, wants to activate a handset in a RadioShack store, there is more of you who are going to activate on Verizon than on T-Mobile."
Other industry watchers agreed.
"This trades the weak for the strong," Janney Capital Markets analyst David Strasser said.
The T-Mobile partnership has long been a drag on the retailer's business and a cause of worry for analysts.
"RadioShack gave up a lot of compensation from AT&T and Sprint 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.
The company also reported a drop in quarterly profit 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. Excluding items, it earned 31 cents a share.
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.
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.