Fort Worth, Texas — RadioShack is taking a $62 million inventory write down, prompted by disappointing wireless sales and weakness in high-margin categories, which led to a 62 percent decline in net income to $49.5 million during the 2005 fourth quarter, ended Dec. 31.
The poor showing has compelled the company to launch an aggressive turnaround plan that includes closing 400 to 700 of its more than 5,000 company-owned stores over the next 18 months, re-assorting its merchandise mix with faster-turning products, and expanding its profitable wireless kiosk operation.
“Sales results were good in many low-margin, non-wireless categories; however, we experienced lower sales in high-margin categories,” said president/CEO David Edmondson. The low-margin categories included digital cameras, MP3 players and pre-paid wireless airtime, noted CFO David Barnes, while the high-margin categories included batteries and wireless accessories.
“In addition, wireless sales and profits were below our expectations,” Edmondson said, reflecting industry-wide softness and RadioShack’s carrier transition from Verizon to Cingular.
“The poor fourth quarter performance caused us to take a much deeper look at the state of our business,” Edmondson continued, “and resulted in the launch of a turnaround plan including the significant fourth quarter inventory write-down.”
In addition to performance issues, RadioShack must also contend with recent revelations that Edmondson’s academic credentials were misrepresented in his resume and corporate biography.
In a conference call held this morning, Edmondson apologized to the company’s investors, board of directors and employees for any embarrassment he caused. “It’s in the board’s hands,” he said of the resume flap, and asked all constituencies to focus on the turnaround plan while the directors investigate the controversy.
As previously reported, fourth quarter 2005 comparable store sales were up percent vs. the prior year, while total fourth quarter sales were up 5 percent to $1.7 million.
The gross margin rate declined 819 basis points to 41.1 percent in the fourth quarter due primarily to the write-down of inventory, a merchandise mix shift, and more promotional activity compared to the prior year period.
For the full year, RadioShack reported net income of $265.3 million, down 21 percent from 2004. The impact from costs related to RadioShack’s transition from Verizon Wireless to Cingular was $19 million due to inventory write-downs and labor, most of which was incurred in the fourth quarter.
Full year comparable store sales were up 1 percent over 2004, while total sales were up 5 percent to $5 billion.
“RadioShack failed to achieve its financial objectives in 2005,” Edmondson said. “We implemented several key changes including executive management, advertising, store operations, merchandise assortment, long-term wireless agreements, and more. We believe that the company’s strategy is sound. But we must move at a much faster pace with a greater sense of urgency, and that is what necessitates our turnaround plan.”
The 18- to 36-month-long turnaround effort is designed to achieve three major goals: increase the average unit volume of RadioShack’s core store base; rationalize its cost structure, and grow profitable square feet in its store portfolio, the company said.
To achieve those goals, RadioShack will replace old, slower-moving merchandise with new, faster-moving merchandise within higher growth categories. The company will also concentrate its efforts and investment on improving top-performing stores in order to deliver “a great customer experience.” This includes closing upwards of 700 company-operated stores and “aggressively” moving others to better locations.
In addition, the company intends to “better align overhead costs with its business model,” which will help generate more profit per square foot, and will close its distribution centers in Charleston, S.C. and in Southhaven, Miss.
RadioShack will also continue to expand its wireless kiosk business. The company currently operates over 700 product and service kiosks for Sam’s Club and Sprint, and plans to grow the operation to more than 1,100 locations over the next few years.
The cost of the inventory transition and store closures are expected to be between $55 million and $100 million this year.
“While the execution of the turnaround plan will trigger the recognition of significant costs, we are confident that the steps we are taking will put RadioShack back on the track to sustained profitable growth,” Edmondson said.