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R’Shack Q2: Sales Down, Profits Up

Fort Worth, Texas — Ongoing efforts by RadioShack to cut costs and add higher-margin products to its assortment yielded improved metrics for the chain’s second quarter, ended June 30.

The company reported net income of $47 million for the period compared with a net loss of $3 million for the year-ago quarter, and cited improvements in gross margin rate, expense rate and cash balances. The latter increased $460 million, to $630 million, by the end of the three months, driven by the growth in net income and improvements in working capital management.

Nevertheless, total revenue fell 15 percent and comp-store sales slipped 8.9 percent, attributable to the closure of 481 stores last year and declines in RadioShack’s post-paid wireless business.

“We are increasing our focus on opportunities to offer our customers solutions to their needs, whether those needs can be met with a simple ‘one product’ solution, or whether a more complex solution requiring our expertise in connectivity is needed,” said Julian Day, chairman and CEO. “Our improved gross margin rate this quarter reflects some success in increasing the role of the ‘value-added’ products in our mix, as well as our commitment to continue to ‘freshen’ the merchandise we offer our customers.”
On a category basis (excluding the effect of 2006 store closures):

·         RadioShack’s wireless business fell nearly 17 percent for the period due to increased wireless competition, a challenging wireless industry environment, a customer shift to prepaid plans and products, and a decline in wireless promotional activity, the company said. The declines were partially offset by increases in sales of new GPS products and prepaid wireless handsets.

·         Sales of accessories declined 4.4 percent led by weakness in home entertainment, wireless, and iGo power adapter sales, partially offset by increases in media storage and headphones.

·         Sales within RadioShack’s “modern home platform,” comprised of phones, A/V, satellite TV, and PCs, edged up 0.7 percent thanks to gains in flat panel TVs, DVD players and PC peripherals, offset by declines in phones, audio, and surveillance products.

·         Sales of personal electronics fell 14.1 percent due to declines in satellite radios and digital music players, partially offset by increases in digital cameras.

·         Battery and charger sales decreased 4.7 percent on weakness in general purpose batteries and special purpose lithium batteries.

·         Technical platform sales (comprised of wire and cable, connectivity products, components and tools, and hobby and robotic products) slipped 1.4 percent on declines in metal detectors and robotic kits, offset by sales of audio cables.

·         Services, including prepaid wireless airtime, extended warranties and bill payment revenue, increased 3.4 percent due to gains in airtime and service plan sales.

Separately, revenue at RadioShack-run wireless kiosks fell 14.4 percent to $144.6 million due to fewer kiosks and the challenging wireless industry, the company said.

Sales, general and administrative expenses declined by $106 million, or 22 percent, for the period due to reductions in payroll, professional fees and advertising, including 280 corporate support staffers who were pink-slipped during the first quarter. The company also generated $132 million of free cash flow for the six months, ended June 30 — compared with a use of cash of $138 million for the same period last year — thanks to improvements in working capital management, more prudent allocation of capital expenditures and increased levels of net income, the company said.

“Against the background of a smaller, but more profitable, sales base our financial performance this quarter marked a continuation in trend. Our continued disciplined management of expenses and working capital allowed us to drive improved profit and produce increased levels of cash on the balance sheet,” added chief financial officer Jim Gooch. “We continue to look for opportunities to improve our company’s performance as we head into the second half of the year.”
Analysts were less optimistic. In a research note, Banc of America Securities’ David Strasser observed that “room for eliminating incremental unallocated expenses is running out,” and that top-line growth will be “elusive” to RadioShack as its core wireless category remains “a significant drag on the business and shows no signs of improvement.”