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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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