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RadioShack Net Income Blown Away

Fort Worth, Texas — RadioShack’s net income fell 85 percent to $8.4 million in the first quarter, down from a year-on-year $55 million, due primarily to weaker-than-expected mobile phone sales and inventory write-downs.

However, first quarter sales edged upward 3 percent, reaching $1.2 billion, compared with $1.1 billion in the year-ago three months, comp-store sales at RadioShack dipped 1 percent for the period.

“Wireless sales, in particular, were below our expectations and helped contribute to overall financials that were disappointing,” said Claire Babrowski, president and acting CEO. “While we knew first quarter would be weak, the results are worse than we anticipated.

The retailer’s operating income for the first quarter, ended March 31, was slashed by more than $62 million, dropping to $24 million in the period, from $86.2 million the prior year.

Gross margin in the quarter declined over 2 percentage points to 48.3 percent, from 50.4 percent in the same three months in 2005. At the same time, quarterly expenses increased 10 percent, hitting $495.7 million, up from a year-earlier $450.5 million.

Write-downs in connection with RadioShack’s turnaround plan related to fixed assets and inventory reduced the retailer’s pre-tax income by about $10 million.

“We clearly have a lot more work to do to get this company back to levels of profitability which we all expect. The first quarter results do nothing to change our belief in the turnaround plan announced early this year. We have made progress in implementing the plan, and we continue to be confident we are making the right moves that will benefit RadioShack significantly over time,” said Babrowski.

RadioShack said the first-quarter decline in gross margin was driven primarily by an unfavorable merchandise mix shift, more promotional activity and higher-than-company-average sales growth of its lower margin kiosk channel. The retailer operates nearly 800 wireless kiosks, as well as over 6,000 company and franchised stores.

The increase in expenses, said the retailer, was due in part to compensation, and, in particular, more store labor hours, compared with last year. Other incremental drivers of expenses included more kiosks, rent from the recent sale and lease-back of the company’s headquarters here, and expensing stock options, said RadioShack.

In a conference call with analysts, Babrowski emphasized how “disappointing” RadioShack’s first quarter was. “While we expected this to be weak and volatile, results were worse than anticipated,” she said. “Right now we believe in our turnaround plan, but we still expect a couple of more challenging quarters.”

Specifically, RadioShack said sales of Cingular postpaid handset units and power products were off in the quarter, while satellite radio, MP3 and related accessories were up. Sales of satellite radios doubled and sales of Bluetooth and headphones increased.

The retailer sited an 8 percent decline in its power platform and 56 percent drop in services. General purpose battery sales declined, as did batteries for cordless phones. To remedy this, stores are going to have fixture changes that will beef up power walls and increase display space.

To date, the chain has closed 480 stores out of a possible 700 or so identified for elimination. It expects to increase the number of kiosks by about 200. With the completed store closings, the retailer said it did not exit any particular markets, and that closings would be completed by August. Clearance sales are ongoing from April through August.

There is a high level of urgency to improve RadioShack’s wireless business, analysts were told. This includes balancing both the national and local approach to marketing, improving profitability, more competitive pricing and driving phone and service package sales. “The impact on wireless can be attributed to RadioShack, to what we have or haven’t done,” said Babrowski.

The intent is to move the customer relationship to Cingular back above plan by increasing awareness that encompasses the entire wireless business, said the retailer. This includes improving marketing and media tactics so customers respond, and shifting the approach to advertising and marketing.

“There is a misconception that we have turned our backs on technology products, shifting to products that turn faster with thinner margins,” said Babrowski about whispering in the marketplace which claims RadioShack is more concerned with emulating the big-box stores. “We are identifying the products customers don’t demand and liquidating these,” she said.

There will be more emphasis on Bluetooth, power, headphones, home networking, MP3 and HD radio. With assortment transition, 80 percent of store display will not be affected, said the chain.