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RadioShack Posts Q3 Profit, Lower Sales

10/29/2007 10:32:00 AM Eastern

Forth Worth, Texas — Ongoing cost reductions and improved inventory management allowed RadioShack to post $46.3 million in net income during the third quarter despite sagging sales.

The chain reported a net loss of $16.3 million during the year-ago period.

Net sales, however, slipped 9.4 percent to $960.3 million during the three months, ended Sept. 30, while same-store sales declined 8.6 percent year-over-year. RadioShack attributed the downturn to weakness in its Sprint wireless business and to softer sales of wireless accessories and personal electronics. The declines were partially offset by “strong performance” in prepaid wireless phones and GPS devices.

“We are pleased to announce the continuation of improved financial results in the third quarter,” said Julian Day, RadioShack’s chairman/CEO. “We continue to face challenges at the top line in our business, mainly as a result of well publicized developments in post-paid wireless related to Sprint. We are addressing those challenges energetically and hope that having configured the business for increased profitability. We will now prove successful in configuring it for growth.”

The company said selling, general and administrative expenses (SG&A) declined by 13 percent, or $57.4 million during the quarter, and that its net inventory position (inventory minus accounts payable) lessened by $190 million. As a result, its gross margin rate increased 490 basis points to 51 percent, up from 46.1 percent last year.

RadioShack said it trimmed expenses by cutting staff, reducing legal and consulting fees, and by modifying its vacation accrual policy.

Looking ahead, the company says the economic environment will precipitate a “challenging” fourth quarter for the industry in terms of consumer demand and the competitive landscape. In a research note, retail analyst David Strasser of Banc of America Securities said he believes the holiday period will also be challenging for RadioShack, which “has essentially lost relevance, particularly in wireless.”

Results for the quarter by segment, excluding the effects of last year’s more than 500 store closures, are as follows:

  • Wireless decreased 14.1 percent, primarily driven by a decline in postpaid wireless sales for its two main wireless carriers. “We believe that these sales declines were the result of increased wireless competition, a challenging wireless industry environment, and a shift to prepaid handsets and corresponding service plans,” the company said.

  • Accessories decreased 4.3 percent, primarily as a result of declines in wireless and home entertainment accessory sales, but partially offset by increases in media storage and headphones sales.

  • Modern home (including residential telephones, A/V, satellite systems and computers) increased 1.3 as a result of increased sales of flat-panel televisions, laptop computers, PC peripherals and flash drives, offset by sales declines in residential telephones, audio and surveillance products.

  • Personal electronics (including digital cameras, digital music players, toys, satellite radios, camcorders, general radios and wellness products) decreased 12.2 percent, driven primarily by sales declines in satellite radios and digital music players, but partially offset by increased sales of digital cameras and robot and hobby-grade remote control devices.

  • Power (including general and special purpose batteries and battery chargers) decreased 6.1 percent as a result of decreased sales of general purpose and special-purpose telephone batteries.

  • Technical (including wire and cable, connectivity products, components and tools, as well as hobby and robotic products) decreased 1.7 percent due primarily to a decrease in sales of metal detectors and robotic kits, partially offset by an increase in audio cable sales.

  • Service (including prepaid wireless airtime, extended-service plans and bill-payment revenue) decreased 3.3 percent. Prepaid airtime sales increased but were largely offset by decreases in bill-payment revenue.

  • Kiosk sales, which consist primarily of handset sales, postpaid and prepaid commission revenue and related wireless accessory sales at the company’s 751 wireless kiosks, located mostly in Sam’s Club, decreased $15.7 million. While these decreases are partially attributable to fewer kiosk locations compared to the prior year, the sales decline was primarily the result of increased wireless competition, a challenging wireless industry environment, and a customer shift to prepaid handsets which are generally priced lower than postpaid handsets.

  • “Other” sales were down 9 percent. This segment include sales to RadioShack franchisees, outside sales through service centers, e-commerce sales, sales to RadioShack’s Mexican joint venture, sales to commercial customers, outside sales of global sourcing operations and manufacturing facilities, and, in 2006, sales of the now-closed Canadian company-operated stores. The decreases were partially due to fewer franchise stores in 2007, as well as a decline in product sales to these dealers.

The company operated 6,703 retail locations in total at the end of the quarter.

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