RadioShack's Q1 Profits Quadruple, But Sales Decline

FORT WORTH, TEXAS — Significant reductions in selling, general and administrative expenses (SG&A) and improved gross margins helped RadioShack increase its first-quarter net income more than 400 percent to $42.5 million.

The cost-cutting, which has included extensive closures and most recently 280 layoffs primarily at company headquarters, helped offset weak sales. Net revenue fell 14.5 percent for the quarter ended March 31, and same-store sales slipped 9.2 percent over the period.

In a statement, chairman/CEO Julian Day recalled warning of weak first-quarter comps earlier this year, which he attributed to the "highly promotional nature of our business" during the year-ago period. "Nonetheless, against this background we were able to produce financial results which reflected steady improvement in our operating economics," he said.

SG&A expenses were $412 million in the first quarter, down $84 million or 16.9 percent vs. the prior year. The decrease was due to cost reductions in payroll, advertising and outside services, and partially offset by the costs associated with the employee separations.

Chief financial officer Jim Gooch acknowledged the chain's "top-line sales challenges, particularly in the wireless business," but promised to "continue to bring a disciplined approach to the management of our business, with the goals of improving profitability, strengthening our balance sheet and driving cash flow."

In a research note, Bank of America retail analyst David Strasser described the expense cuts as "drastic" and worrisome for the company's long-term prospects. "Cutting commissions and benefits to drive short-term earnings improvements will inevitably leave the company in poor shape," he observed. "RadioShack, more than others, depends on its sales force to drive revenues, due to an aggressive cross-selling strategy. Management can blame sales weakness on wireless, but we believe depleted morale and the departure of many top sales people drove the weak comps."

Strasser added that RadioShack's free cash flow of $37 million and cash balance of $463 million "resulted from starving the stores of any capital expenditures. This, once again, provides improved short-term metrics that will inevitably prove particularly troublesome, in our opinion."

Conversely, Goldman Sachs analyst Matthew Fassler lauded Day's moves. "[The] results reinforce our view that CEO Julian Day can raise profitability to surprising levels, and that there is in fact a place in the U.S. consumer world for a convenience-based retailer of technology solutions."

Comp sales by category at RadioShack's company-owned stores during the quarter were as follows:

• Wireless (including handsets and communication devices such as scanners, GPS and two-way radios) decreased 25 percent, primarily driven by a decline in unit sales of wireless handsets. This decrease was partially offset by the sales of various recently-introduced GPS products;
• Accessories (including those for home entertainment products, wireless handsets, digital imaging products and computers) were flat. The results included increases of music and computer accessories sales, offset by a decline in sales of both home entertainment accessories and iGo power adapters;
• Modern home (including telephones, A/V, satellite systems and computers) increased 4 percent;
• Personal electronics (including digital cameras, camcorders, toys, wellness products, digital music players and satellite radios) decreased 9 percent, driven primarily by fewer sales of satellite radios and toys;
• Power (including general and special purpose batteries and battery chargers) increased 1 percent due to increased sales of special-purpose lithium batteries;
• Technical (including wire and cable, connectivity products, components and tools, as well as hobby and robotic products) decreased 3 percent;
• Service (including prepaid wireless airtime, bill payment revenue and extended service plans) increased 4 percent due primarily to increased sales of prepaid wireless airtime and extended service plans.