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RadioShack Q1 Sales Rise, Profit Drops

Fort Worth, Texas – Carried along primarily by strength in wireless communications and digital photography, RadioShack recorded a 3 percent increase in sales during the first quarter, reaching $1.07 billion, up from $1.03 billion in the year-ago period.

However, net income dropped to $56.6 million at RadioShack during the three months, ended March 31, compared with $57.6 million in the same period in 2002. Operating income declined nearly $5 million in the first quarter, down to $97 million, compared with $101.9 million in the same three months a year earlier.

Comp-store sales climbed 5 percent in the three months.

The retailer said it generally attributes its profit shortfall to a 90-basis-point drop in gross margin, down to 49.3 percent in the first quarter, combined with Selling, General and Administrative (SG&A) expenses that trended upward some 3 percent to 4 percent in the three months.

‘RadioShack’s first quarter results were driven by strong sales in highly relevant electronics products and services that today’s customers demand and RadioShack is best positioned to sell,’ said Leonard Roberts, chairman/CEO, looking at the brighter sales side.

In specific category sales, said RadioShack in a financial analyst call-in presentation following release of its first quarter numbers, computers enjoyed a 13 percent increase, digital photo products climbed 50 percent, the portables category doubled and accessories batteries rose 3 percent.

On the down category-sales side in the first quarter, home entertainment accessories dropped in the single digits, wireless accessories were off 13 percent and direct-to-home satellite slid 45 percent.

RadioShack emphasized, in its conference call, the importance of its wireless communications business, which currently accounts for about one third of chain sales. Sales increased 14 percent in the first quarter in this category and are expected to maintain strength the remainder of the year.

Roberts said wireless communications – which includes handsets, accessories and services – is benefiting from ongoing programs with both Sprint and Verizon. He said RadioShack was focusing on a higher quality subscriber, powerful promotions and online activation that gets the customer out of the store with a ready-to-use handset in 10 minutes, among other factors.

The retailer blamed the overall drop in chain margin to the cost of moving out inventory, as well as aggressive discounting, with markdowns, especially in toys, but also in personal audio, small televisions and laptop computers. Gross margin improvement for the second quarter should come in at zero to 20 basis points, said the retailer. Improvements in supply chain management and a change in product mix, with less discounting, should help improve gross margin going forward, said RadioShack.

The size of the average sales ticket increased 6 percent in the first quarter, while first quarter inventory turnover was 2.6 times, compared with 2.4 year-on-year, said RadioShack.

Compared with last year, first quarter inventory was only 1.6 percent higher, despite a 3 percent sales gain. Free cash flow for the three months was $82 million, but this is expected to reach $265 million for the year.

Looking to the second quarter, RadioShack expects a 4 percent increase in comps, with overall sales coming in at slightly less. It also anticipates adding a couple hundred basis points to SG&A. Higher SG&A in the first quarter was attributed to insurance cost increases, healthcare related claims and higher rent, among other factors.

Roberts said the company was somewhat adversely affected by the war in Iraq, but benefited by selling more general-purpose batteries and personal televisions.

Store count in the first quarter reached 5,146, up 18, but down 15 from the fourth quarter of 2002. The retailer plans to open 60 to 70 company stores in 2003, including 50 if its latest prototype locations, called Best of Shop. About 85 to 120 stores will be closed, mainly mall-based locations, leaving the year with an overall decrease of about 25 to 50 units.