RadioShack Posts Q1 Profit, Further Restructures Store Operations

Operating expenses declined to $441.8 million ,from $536.5 million a year earlier, as RadioShack shut 506 stores in fiscal 2006. It also laid off 280 workers in March at its Ft. Worth hq and took an $8.5 million pretax charge against Q1 earnings for severance. The charge was offset by a $14 million refund of federal communications excise tax. The excise tax imposes a 3% levy on long distance phone service. Customers are eligible for refunds because the service has changed in relation to the definition of what is taxable.

RadioShack expects $60-$80 million in capital expenses in fiscal 2007, partly to pay for remodeling and relocation of some stores, the chain said in its 10-Q filed with the SEC. It wasn’t disclosed how many stores will be relocated or remodeled and RadioShack officials weren’t available for comment. The chain ended Q1 with 1,560 dealer stores, down from 1,596 in Q4, and 763 kiosks, down from 772. Most kiosks sell wireless services in Sam’s Club outlets.

In addition to the cost of restructuring its own stores, RadioShack could face $110 million in rent “exposure” as a result of CompUSA shutting some former Computer City locations it acquired in 1998. CompUSA, which this year disclosed plans to close 126 outlets, converted 45 of the 93 former Computer City stores to its own format. Unclear at our deadline was how many of the former Computer City outlets were among the CompUSA outlets being closed. But CompUSA’s restructuring isn’t expected to have “material” impact on RadioShack’s earnings, the chain said. RadioShack has lease obligations on some stores that were sold to CompUSA for $211 million cash and a $136 million, 10-year note, the chain said.

RadioShack’s Q1 revenue declined to $992.3 million, from $1.16 billion a year earlier, on a 9.2% drop in same-store sales. The downturn in sales was blamed on a 25% decline in wireless and 15% in personal electronics sales. Repair service revenue also decreased 22% largely because 5 service centers were closed down last year. RadioShack’s wireless business was plagued by a “sluggish industry environment,” and the decline in personal electronics was spurred by satellite radio and toys, it said. Accessory sales were flat, while those of flat-panel TVs, external hard drives and DVD players were up 4%, it said.

RadioShack’s gross profit margin improved to 52% from 48.3%. Operating income at company-owned locations grew to $178.1 million from $167.1 million, despite a drop in revenue to $848.4 million from $996.1 million. At dealer operated stores and the chain’s website, operating income was $8.9 million vs. a negative $1.1 million a year earlier, though sales fell to $66.6 million from $85.8 million. The kiosk business posted a $4.6 million operating profit, against a negative $2.5 million in fiscal 2006, while revenue declined to $77.3 million from $78.1 million. The chain spent $3.8 million in capital expenses on company-owned stores in Q1, down from $14 million a year earlier.

During Q1, RadioShack recorded a $1 million unrealized loss on warrants for Sirius stock. The chain had earned by Dec. 31 warrants to buy 2 million shares of Sirius stock at $5, 1/2 the amount earned in fiscal 2005, it said. RadioShack also has $150 million in 10-year unsecured notes due Sept. 1. The long-term notes were part of a $300 million debt-shelf offering that took effect Aug. 1997. The notes will be repaid with cash “generated during the year” and “existing cash balances,” RadioShack said.

The chain has a tentative $8.8 million settlement in U.S. Dist. Court, Chicago, in a class-action suit that alleged violations of the overtime provisions of the Fair Labor Standards Act (FLSA). RadioShack booked the $8.8 million last year and is awaiting final court approval of the settlement. A federal judge in 2005 found that some managers at so-called RadioShack “Y” stores -- those with annual revenue over $500,000 -- were misclassified as exempt from the FLSA provision that requires overtime pay for work outside a standard 40-hour work week. The law exempts executives and managers who “customarily and regularly” supervise 2 or more employees. The class-action suit was filed in 2002 by store managers Alphonse Perez and Douglas Philips and grew to include 3,300 members. About 1,520 class members each supervised 2 employees less than 87% of the time they were running Y stores, the plaintiffs alleged. -- Mark Seavy

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“While cash flows and margins seem to be all that is important right now, without improvements in merchandising, the wild horse may be put out to pasture,” Citigroup analyst Bill Sims said of RadioShack’s results. At the same time, Citigroup raised its per-share earnings forecast for RadioShack by 14 cents from its earlier projection on “higher gross margin expectations,” Sims said. That’s much higher than the 54 cents per share earnings RadioShack posted in 2006. “The potential is here if they can ever find out their merchandising,” he said.