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R’Shack Q4 Earnings Up 65%

Fort Worth, Texas— RadioShack posted a 65 percent increase in net income for the fourth quarter, to $84.5 million, as stringent cost controls and a recent corporate restructuring gained traction at the struggling CE chain.

In his first conference call since becoming chairman and CEO last summer, Julian Day outlined a four-point game plan that led to last quarter’s improvements and, he said, should build on those gains going forward. However, he stressed that goosing gross profit dollars, rather than sales volume, remained his first order of business.

Consequently, net sales fell 12.8 percent to $214 million for the three months, ended Dec. 31, 2006, and comp-store sales slid 5.5 percent after adjusting for contractual and reporting changes in sales of prepaid wireless airtime. Without the adjustment, comp sales fell 7.7 percent.

Net sales were impacted by the closing of over 500 stores since the prior-year reporting period, decreased promotional activity, and lower sales of personal electronics and postpaid wireless subscriptions and handsets. The sales declines were partially offset by increases in prepaid wireless sales, MP3 players and accessories.

During the conference call, executive VP and chief financial officer Jim Gooch said that a “negative merchandise mix,” stemming from strong sales in lower-margin categories like MP3 players, GPS and Bluetooth devices, and flash memory, led to fewer gross profit dollars during the quarter. Nevertheless, gross margin improvements through better inventory management and zero markdowns, plus lowered expenses and interest, led to the strong earnings gains. RadioShack’s cash balance increased 111 percent to $472 million by the end of the period thanks to improved working capital management and cash generated from net income, the company said.

For the full year, net income fell 72.5 percent to $73.4 million and net sales declined 6 percent to $4.8 billion. Comp sales fell 5.6 percent year-over-year, but declined 2.8 percent when adjusted for the reclassification of prepaid wireless sales. The company generated $190 million in free cash flow last year, compared to $158.5 million in 2005.

Day told analysts that RadioShack is beginning to show positive signs of improvement compared to recent trends, but that “a great deal more work needs to be done” this year to improve the company’s financial performance and lay the groundwork for the “long-term development of the brand.”

Day acknowledged the “significant level of high turnover” within the company’s senior management ranks, and said the chain had suffered from a lack of focus and constantly shifting strategies and priorities. Instead, Day’s team will focus on four key initiatives to increase profitability and cash flow, and will ensure that they are efficiently executed throughout the organization.

The initiatives include:

Improve the in-store experience. Day’s goal is to improve in-stocks, to assort the “right products at the right stores at the right price,” and to improve labor scheduling by better managing the mix of full- and part-time staffers. The latter will lower costs and improve the customer experience by assuring that the stores are manned by qualified associates during key sales hours. He said the company had made “some progress” in labor scheduling during the fourth quarter, but hopes to have the program properly implemented chain-wide this year.

On the product front, Day said RadioShack is looking to “renew the flow of new and interesting” products, both sourced and private label, as novel items are a core attribute that consumers expect the chain to offer. The company will also move away from a “one-size-fits-all” assortment by offering select items in select stores, based on geography or demography, that would be layered over a core product mix. Determining what that “irreducible core” assortment should be has occupied a great deal of time at headquarters, he said. RadioShack is also exploring ways to improve the profitability of prepaid wireless sales as the industry trends away from postpaid plans.

In addition, the company is increasing its regional focus in order to “respond more effectively to ever-changing local market conditions” — including increased promotional activity by wireless carriers on a regional basis, Day said. To that end, RadioShack has restructured its field management organization and reconfigured its geographic regions. Under the new structure, each region is run by an area VP who is supported by a staff of specialists tasked with executing specific elements of an overall program. Day said that flattening the field organization structure gives senior management “much better day-to-day insight into our districts’ and stores’ operations.”

Increase the gross profit rate. Day plans to achieve this through better inventory management, improved product line transitions, and the “cautious implementation” of dynamic pricing, which can be adjusted to local markets. “We have an opportunity to price differently in different demographic or geographic areas on non-sensitive items to improve gross margins without impacting perceived value,” he said.

Continue to aggressively manage all expenses. Day said cutting costs has become a “way of life” at RadioShack, and will be achieved by “uncovering and capitalizing on cost reduction opportunities across the entire organization” — including improved negotiation and dropping programs or procedures outright.

Improve capital allocation. Day plans to allocate capital to projects that maximize the projected return on investment, and he wants to focus those expenditures on customers in order to drive gross profit. The company plans to spend between $60 million and $80 million on capital improvements, Gooch said, with most of it earmarked for stores, IT and distribution functions.

Day stressed that while sales are the lifeblood of a company, growing dollar volume was not his goal. “We must not sacrifice profitability to drive sales,” he said. “Profitable comp sales are great. We don’t want them to be empty calorie sales.”

Analysts lauded Day’s bottom-line focus, but were still concerned about sales growth and the product portfolio that would drive it. “While cost-cutting efforts appear to be gaining traction,” observed Lehman Brothers’ Alan Rifkin, “we await evidence of top line management, which is key to driving sustainability of the company’s model.”