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R’Shack’s Q2 Revenue Boosted By Converter Box Sales

7/24/2008 10:45:00 AM Eastern

Fort Worth, Texas — Brisk sales of digital-to-analog converter boxes helped boost RadioShack’s second-quarter revenue 6.4 percent to $995 million, the chain reported today.

Profits fell 12 percent, however, to $41.4 million for the three months, ended June 30, due largely to a one-time charge related to a change in its corporate headquarters lease.

Nevertheless, RadioShack sharply beat Wall Street’s sales and earnings expectations, allaying analysts’ concerns over its long-term viability.

Same-store sales rose 6.9 percent thanks to the newfound converter-box business, plus continued strong performance in GPS devices, increased sales in video gaming, prepaid wireless phones, and significant improvement in its AT&T post-paid business, the retailer said.

The comp gains were partially offset by its Sprint post-paid and related wireless accessory business, which continues to be a drag on performance. Excluding Sprint, same-store sales were up 12.7 percent, RadioShack said.

The net sales gain of 6.4 percent was comprised of a 7.5 percent increase at company-owned stores, a 6.1 percent increase in sales to dealer/franchise outlets, and a nearly 30 percent spike in its online business.

The gains were partially offset by a 2.7 percent decrease in kiosk sales, attributable to “significant decreases” in its Sprint kiosk business, which were partially offset by increases in its Sam’s Club kiosks, the chain said.

In a statement, chairman/CEO Julian Day noted, “The economic environment continues to be challenging; however, as a credit to our team, we are pleased with our progress as we begin to drive profitable growth. We continue our focus on opportunities to offer our customers solutions to their needs. Our improved sales this quarter reflect our success in improving our merchandising, store operations and overall customer experience.”

Operating income increased 10 percent to $71.3 million due to the comp-sales gains, but were partially offset by a lower gross margin rate that reflected increased promotions, the strong converter-box sales and a higher mix of wireless upgrades vs. new-subscriber business.

Expenses increased $15 million to $375 million due largely to the amended headquarters lease plus higher wages that were afforded store employees in order to improve overall customer experience and drive profitable same-store sales.

Despite the one-time non-cash pretax charge of $12.1 million ($7.4 million after-tax) for the new lease arrangement, the company anticipates the transaction will save approximately $300 million in rent and occupancy over the remaining length of the original lease.

“We are seeing the benefits of our work last year to establish the company financial model, allowing additional volume to translate directly into increased earnings for the company,” added chief financial officer Jim Gooch. “After successfully right-sizing the cost structure, we have increased our focus on top line sales with the goal of improving gross profit dollars. We will continue to work to improve the mix of sales and gross margin rate in order to maximize our overall profitability.”

Analysts lauded the retailer’s performance. “RadioShack is still relevant,” wrote Banc of America Securities retail analyst David Strasser. “They still have [the] ability to leverage convenient real estate and [a] strong reputation in accessories for profitable earnings growth. Companies with operating margins north of 8 percent are relevant. When they get behind a product or products, the distribution channel is still very powerful.”

Goldman Sachs’ Matthew Fassler concurred. “To some degree, this quarter should help address looming existential questions, in that RadioShack’s role as a convenience-oriented retailer of technology product is a key differentiator, and enables it to capitalize on rolling product cycles.”

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