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RadioShack's iPhone Sales Hurt Profits

2/28/2012 01:35:00 PM Eastern

FORT WORTH, TEXAS – RadioShack’s fourthquarter
earnings slid 79.1 percent to $11.9 million on
increased sales of low-margin iPhones, declines in
its core Sprint business, and the impact of a more
promotional holiday season.

Net sales and operating revenues rose 5.9 percent
to $1.4 billion for the three months, ended Dec. 31.
The gains were largely fueled by the opening of mobile
departments in 646 additional Target stores, for
a total of 1,496 locations.

Comp-store sales for company-operated RadioShack
locations and the Target Mobile centers
increased 2.2 percent, due mainly to higher postpaid
wireless sales of AT&T and Verizon products and
services. Tablets also contributed to the comp sales
gain, which was partially offset by a decline in Sprint
and T-Mobile postpaid wireless sales and lower sales
of digital cameras and digital music players.

In a conference call, president/CEO Jim Gooch
said “the dramatic increase” in iPhone availability
had a negative impact on margin mix year-over-year,
as Apple began providing the device to Verizon and
Sprint. He maintained however that iPhone purchasers
are “still very profitable customers” when accessories
are attached.

RadioShack’s results were also slammed by
Sprint’s decision to drop its popular early upgrade
program. The carrier, Gooch explained, accounts for
most of the chain’s mobile sales.

RadioShack was also disappointed by lower than
expected returns from its Target business. Start-up
costs pressured profits, he said, and RadioShack does not benefit from sales of accessories
and prepaid phones and plans
at Target stores.

CE was another drag on earnings,
said chief financial and administrative
officer Dorvin Lively, who reported a
nearly 30 percent drop in fourth-quarter
CE sales. The category now represents
less than 20 percent of revenues
but less than 10 percent of gross profit dollars, he said, and Gooch added
that the company plans to “de-risk our
approach to CE by using it opportunistically
to drive traffic” and improve
RadioShack’s perception as price
competitive.

Bright spots included large sales
gains within its AT&T business, “great
success” in headphones, and solid
growth in warranties and tablet and
wireless accessories.

Selling, general and administrative costs (SG&A) increased $10.2 million
during the quarter due to the hiring of
additional employees to staff the new
Target Mobile centers. These higher
expenses were partially offset by lower
incentive compensation and rent and
occupancy costs, the company said.

For the full year, net income fell 65
percent to $72.2 million, net sales and
operating revenues rose 2.6 percent
to $4.4 billion, and comp sales decreased
2.2 percent.

Gooch noted that the results are in
line with the company’s Jan. 30 earnings
pre-announcement, and that “despite
our gross margin challenges, we
have a strong balance sheet, are making
progress in our mobility business,
and expect to advance our business
improvement initiatives in 2012.”

Those initiatives include improved
hiring, training and sales processes,
a renewed focus on higher-margin
private-label products, and a mobilespecific
marketing campaign that will
span TV, print, direct and social media.

Nevertheless, Gooch projected
continued earnings declines this year,
particularly in the first quarter, which
will ease as the company balances
its Sprint and iPhone sales across its
complete carrier and smartphone portfolio.

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