RadioShack Corporation (RSH) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.23.13 | About: RadioShack Corporation (RSH)

RadioShack (NYSE:RSH)

Q2 2013 Earnings Call

July 23, 2013 9:00 am ET

Executives

Bruce Bishop

Joseph C. Magnacca - Chief Executive Officer and Director

Holly Felder Etlin - Managing Director

Analysts

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

David Gober - Morgan Stanley, Research Division

Michael Baker - Deutsche Bank AG, Research Division

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Rosemary Sisson

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 RadioShack Corporation Earnings Conference Call. My name is Jackie and I will be your coordinator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn this presentation over to Mr. Bruce Bishop, Vice President of Investor Relations. Please proceed.

Bruce Bishop

Thank you, Jackie. Good morning, everyone, and welcome to the RadioShack Second Quarter 2013 Investor Conference Call and Webcast. With me on the call today are Joe Magnacca, our CEO; and Holly Etlin, our interim CFO. Please note that we filed our 10-Q with the SEC earlier this morning. Our earnings release and 10-Q filing are available on our website and a replay of this webcast will be available later today.

I want to remind everyone that we may make forward-looking statements on the call today, either in our prepared remarks or in associated question-and-answer session. These statements would include words like expect, believe, anticipate or words with similar meaning and are based on our beliefs and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from our forward-looking statements about those results.

These risks are detailed in our various filings with the SEC, such as our most recent Form 10-K, as well as our news releases and other communications. The company does not undertake to update or revise any forward-looking statements, which speak only as of the time they are made.

Finally, following our prepared remarks today, we have allowed time to address any questions that you may have. [Operator Instructions] With that, let me turn the call over to Joe.

Joseph C. Magnacca

Thank you, Bruce, and good morning, everyone, and thank you for joining our conference call today. I'll be making a few opening remarks about the quarter, then we'll discuss the financials and then we'll provide an update on our turnaround efforts.

Overall, we have made solid progress on the initiatives that I outlined on the first quarter call: repositioning our brand, revamping our product assortment and reinvigorating our stores. Importantly, we drove comp store sales growth in the second quarter, a first time since the fourth quarter of 2010, and this was driven in part by increased sales for the sixth consecutive quarter in our high-margin signature line of products.

At the same time, our profitability is not where we have -- where we would've liked. Our strategy this quarter was designed to move through unproductive inventory and test new promotional vehicles. These strategies were part of our effort to revamp our product assortment and reposition our brand. We knew this would have an impact on our gross margin rate. Though the effort was important and we made progress, we expected additional sales volume, which would've led to a better year-over-year comparison on our profitability this quarter.

In addition, we opened our first concept store in Manhattan last month. The new concept store is noticeably different and dramatically changes the shopping experience. It brings to life the new merchandising strategy with a cleaner and more open feel, much less merchandise density, clear product displays with power branding statements and more opportunity for customers to interact with the products we sell.

We also announced 2 new strategic partnerships. The first was Maker Media, which reestablishes our brand with the do-it-yourself hobbyist. The second was with NASCORP, the wholesale distributor and service provider for nearly 4,000 college bookstores, which allows us to engage with college students. In fact, the first store on the University of Texas at Austin opened a couple of weeks ago. We're excited about the potential these new partnerships bring to our brand.

With today's earnings release, we announced that Dorvin Lively, our CFO, has resigned to pursue a new career opportunity with a strategic equity-owned retail company. I'm pleased to have Holly Etlin from AlixPartners serve as interim CFO until a permanent Chief Financial Officer is named. In her interim CFO role, Holly will be providing the finance update on today's call. Let me now introduce Holly and hand over the call to her. Holly?

Holly Felder Etlin

Thank you, Joe, and good morning, everyone. As Joe mentioned, the second quarter performance came with a few challenges. Our comparable store sales were positive 1.3%. However, total sales were down 0.5%, driven by the impact from closed stores. We had a net decline of 112 units in the U.S. or just over 2.5% fewer stores.

In our U.S. company-operated stores, our high-margin signature platform generated comparable store sales growth of 6.4% and total sales growth of 4.6%. This growth came from wireless accessories, portable speakers and AC adapters.

Our mobility platform generated comparable store sales growth of positive 1.7%, while total sales were down 0.9%. Our prepaid business continued to see double-digit growth as consumers respond to the expanded assortment of smartphones and the value of the prepaid model. Our postpaid units declined as the result of soft consumer demand for postpaid phones.

Our consumer electronics platform generated comparable store sales decline of 9.8% and a total sales decline of 11.3%. The decline in sales was driven by lower sales of laptop computers, MP3 players and GPS devices, all of which are categories the company is deemphasizing.

Our consolidated gross margin rate declined 2.9 percentage points versus last year. As Joe mentioned, this was driven by our promotional and clearance efforts to reduce unproductive inventory and testing of promotional vehicles, which affected all 3 platforms.

Our SG&A was flat to last year. Operating loss came in at $41 million versus a loss of $14 million last year.

Next, let me give you a quick update on our balance sheet and liquidity. We continue to have a strong balance sheet. Our inventories were down $3 million versus last year. Importantly, however, they were down $101 million versus the end of the first quarter, which includes the sale of $50 million of inventory to Target related to the discontinued Target Mobile business.

The balance of the inventory change was driven by the intentional effort to lower inventory in categories such as laptops, memory players and others, along with our effort to reduce unproductive inventory, which Joe previously referred to. We believe the quality of our inventory is good and have a number of initiatives designed to better manage inventory in the future.

At the end of the quarter, we had total liquidity of $818 million, which includes $432 million of unrestricted cash and $386 million available under our ABL credit facility, which expires in January 2016. Our 2013 convertible notes, which are due August 1, have a remaining par value of $214 million, reflecting the purchase of $2 million of these notes during the second quarter. We intend to pay the remaining balance of the converts when they come due in cash.

Now, let me turn the call back over to Joe to talk a little bit about the turnaround efforts. Joe?

Joseph C. Magnacca

Thank you, Holly. Looking ahead, we expect the turnaround to take several quarters. And during that time, our results may vary quarter-to-quarter as we make strategic changes to improve our financial performance. We will be guided by the 5 pillars of our turnaround strategy: repositioning the brand, revamping our product assortment, reinvigorating our stores, operational efficiency and financial flexibility.

As we reposition our brand, you will see a clear and consistent message around the theme of "Let's Play." You will see us test and experiment with promotional vehicles and co-branding opportunities with strategic partners that can help us connect with consumers and create a call to action to shop with us.

You may notice that we shift our ad spending between primary channels: print, television and digital. We will be measuring our success with the Net Promoter Score tool. We began tracking our results using this tool in the first quarter and we are pleased with our starting point relative to our competitors.

Our efforts to revamp our product assortment are well under way. During the second quarter, we began the process of removing duplicate inventory and unproductive inventory through promotions and clearance events. We believe we can reduce the number of SKUs in our stores from over 4,000 to under 3,000 and potentially more. We've analyzed our business and identified the SKUs that drive demand in a given store's trade zone, so that we can localize the assortment and focus the inventory on products that generate the majority of our sales and profits.

We're also making progress on the -- on our private brand strategy, including rationalizing the number of private brands in our portfolio and rebuilding the product innovation capability from -- to a move to the "me-too" strategy to a true unique innovation strategy. One example of this is our Bluetooth speakers, where our top-of-the-line Auvio model includes an exclusive 3D sound by Sonic Emotion. And we have more innovation planned for the fall.

We're also working with our branded vendor partners to move from a transactional relationship to a deeper, strategic relationship. The team and I have been meeting with our vendors. Many of them attended our strategic vendor summit in May to discuss the pillars of our turnaround strategy. This was our first vendor meeting in a long time, and you will see the outcome of these strategic discussions play out in our product assortment and marketing collaboration over the next coming quarters.

The strategy for reinvigorating our store experience will be led by the concept stores. As I mentioned earlier, we opened our first concept store in Manhattan at 2268 Broadway at 81st Street. We have a handful of others that will open between now and the end of the year, and these stores cast a vision for where we're taking the brand. I want to emphasize that there is significant opportunity to improve a store's performance without investing capital in a full concept store remodel.

Our plan is to invest capital for new stores and remodels in a small percentage of our store portfolio in highly visible and in high-traffic locations. The broader base of our stores will benefit from re-merchandising the store as we move through the typical fall reset. We will reduce and focus the inventory in these stores, which will create a cleaner and more open feel.

We will also focus on creating clear product displays with power branding statements and power category statements and provide more opportunity to interact with products we sell. We are also investing in our store associates through a new training program to build their knowledge and through the new whole store selling model.

On our eCommerce platform, we are making investments today that will provide a continuous opportunity to engage with our customers and drive sales. All of these initiatives will extend to our growing dealer franchise network. Many of these changes will become more visible as we move through the balance of the year.

In addition to repositioning our brand, revamping our product assortment and reinvigorating our stores, our turnaround plan has 2 additional pillars that are focused on improving our operational efficiency and enhancing our financial flexibility. To support and accelerate these 5 pillars, we have decided to bring in AlixPartners. We have worked with AlixPartners in the past and they are well known for their expertise in corporate turnarounds, having worked with many companies in many industries. In addition, we have engaged Peter J. Solomon Company, an investment bank, that will help us evaluate opportunities and strengthen our balance sheet and provide additional financial flexibility. We will keep you informed on both these tracks as we develop specific initiatives.

We have a clear plan of action and our team is completely focused on driving the business forward. I remain confident that we can build our -- build on our strengths, improve our financial performance and return this company to the position of prominence in the lexicon of American retailers.

Now, let me turn it over to the operator to direct our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Dan Wewer with Raymond James.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

In the 10-Q, it indicates that capital expenditures for the year expected about $50 million to $70 million. I believe you only spent $11 million in the first half of the year. So when you look at the $40 million to $60 million of CapEx you're expecting for the next 6 months, how much of that is going to be invested in remodeling into this new store concept?

Joseph C. Magnacca

So the primary investment on our capital is really infrastructure related to IT for the balance of the year. We are consistent with our capital spend versus previous years -- this year. So essentially, we've taken the capital that we had allocated at the beginning of this year and repurposed it against the new store initiatives, so there's no incremental spend against it and it's a relatively small number.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

So the step-up of $11 million in CapEx in the first 6 months to $40 million to $60 million in the next 6 months is all IT?

Joseph C. Magnacca

It's the -- predominantly IT infrastructure as it relates to eCommerce and what we're calling continuous channel.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

And then looking at the new concept stores, how many of these are you expecting to have in place by the holiday season?

Joseph C. Magnacca

Yes. Right now, there is actually the store on Broadway we spoke about on the call in the formal remarks. But in New Jersey, the Newport Centre had also opened up post the end of the quarter into this quarter. There are about 10 locations currently under construction as we speak, and they're being tested in primarily the New York marketplace. And so there'll be about a dozen stores that will kind of represent different segments of our business in and around the New York area. What's also happening concurrently is a lot of work in re-merchandising our stores quietly here in Texas and also in the New York marketplace. I'll point out Manhattan Mall as an example in New York where we have gone in and re-merchandised the stores in the spirit of the Broadway and 81st store. So essentially, without the bells and whistles, the work is currently happening in stores across the chain as we speak.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

And then the final question I have right now, that the initiative to reduce the SKU count from 4,000 to 3,000, is that only in the new concept stores or is this for all stores? And what impact will this have on your future inventory growth?

Joseph C. Magnacca

Well, I don't think we know what the full impact is going to be relative to the inventory as we're still working through it. But I think the work that we're doing on duplication of SKUs and redundancy obviously will have application across our total business, I think. What needs to be pointed out is that we will -- we have been on this journey in Q1 and Q2 and we're evolving to a good place relative to SKU count, so that we can invest some of that inventory back into some new categories. And perhaps, you'll see in our stores today, one of the big focuses where we've taken some of that inventory reduction and reinvested it and still been able to kind of lower inventory versus last year is in the category of electronic health. Whether it's Fitbit or products like that, we invested some of that inventory back in some categories, so -- and the other point that I -- that we briefly touched on in the prepared remarks was the fact that there will be a localized assortment. So the store on Broadway and 81st, from a content perspective, is different than the store at Newport Centre in New Jersey. And that's -- obviously one's a mall location and one is a streetscape location, but we'll be doing more modification based on location than we ever have in the past.

Operator

Your next question comes from the line of Michael Lasser with UBS.

Michael Lasser - UBS Investment Bank, Research Division

First, on the store remodeling program, are you going to only remodel a selection of the stores because of a constraint of resources or is it -- is that the intended strategy where you think you only need to remodel a handful of stores and then have a halo benefit to the rest?

Joseph C. Magnacca

Well, I think I'll start with that comment on halo. Certainly, my experience has suggested, whether it's my previous role here in the U.S. or in Canada, the halo strategy works quite effectively. As we've pointed out, we want to focus the capital investment in stores that have huge upside as it relates to touching the number of consumers. So high-volume locations, high-visibility locations is where we'll spend the most capital. But the fundamentals of that change we'll start applying across our business, even here in Fort Worth, for example, where we have de-SKU-ed stores and started opening up aisles. I'll give an example of a couple of the fundamentals that we'll apply that are pretty significant, we think, in how we design our stores. If you go into the Broadway and 81st store, you'll notice that mobility has been moved to the wall, as opposed to a tabletop merchandising unit. And that is, we believe that is going to be game changing relative to the growth of that category in those stores. The reality is that any of the stores that we're touching, what we refer to as a low-touch store or a no-capital store, we are still moving phones to the wall because we believe the visibility of phones and the way people shop phones, it's more appropriate to put it up against a wall than on a tabletop format moving forward. So the consistency of strategy, regardless of whether you spend capital or not, is really fundamental to what we believe as merchants in this environment. The number of stores we're going to touch and high -- are obviously based on several things. As I talked about high-density population, high visibility, ability to touch areas where there's high tourism, where we have long lease life, all of those things will be considerations relative to where we spend, where we spend our capital. But again, our objective is to create that halo effect using these stores in key markets.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And I know it's early days, but can you give us some sense of what the margin profile of the business is going to ultimately look like, perhaps based on the model for the new store? Presumably, you've put -- constructed a unit economic model that you feel comfortable with.

Joseph C. Magnacca

Yes. I mean, obviously, that's -- it's too early to talk to that. But I would say that, as we've said earlier, our objective is to grow our mobility business profitably moving forward. And I'm really pleased with the work we've done this quarter in managing margin on mobility. So we -- and we've still got to grow mobility in our business, why I'm pleased with our comp sales growth in that segment. But a lot of the focus will be on the non-mobility business to grow at an accelerated rate, which, as you know, as we've talked about our signature product range, comes with pretty rich margins attached to it. So we see the opportunity if we can get that balance right, including the shift that's happening with mobility to prepaid from postpaid as an opportunity to drive margin in a different direction.

Michael Lasser - UBS Investment Bank, Research Division

And then my last question is on the nature and the status of your relationships with the vendor community. Can you give us a sense for how often you're having to talk through your financial situation with your key vendors, especially in light of your AP-to-inventory ratio falling pretty precipitously this quarter?

Joseph C. Magnacca

I'd say there's been some ongoing conversations that certainly Dorvin has had in the past and the team has had, which, at the end of the day, are relative to, I think, the situation we're in as a business. But the great news, from a vendor perspective, is that our relationships have changed really from transactional to strategic. And I say -- I don't say that lightly because I would say that the outreach from this business to our vendor community has been certainly not what it had been in the past. And certainly, my view is that the strength in our relationship, which will carry over to other elements including the one you're referring to, is all based on confidence in our business model. So we were very clear and very purposeful in sharing our strategy with our -- with the vendor community in the middle of May of this year. So they fully understand where we're taking the business and the brand, so they can place their bets on us, which I believe they are.

Michael Lasser - UBS Investment Bank, Research Division

And why did the AP-to-inventory ratio change so significantly?

Holly Felder Etlin

Again, as we -- this is Holly Etlin. As we explained previously, there was an effort to reduce inventory. And when you are working at reducing inventory, by design, you're obviously incurring less AP. So part of what you're seeing at the end of this quarter is by design and part of it is just timing, as we shift when the business is actually buying and assorting its inventory.

Operator

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

My first question relates to the gross margin trends that we saw in Q2. How much of the decline would you attribute to a deliberate effort to clear inventory as part of your strategic process? And how much of it was a decline that you would rather not have seen based on performance of promotions and discounts and such?

Joseph C. Magnacca

Yes, I think that was -- it's a good question. I would say I would characterize the margin decline -- the majority of the investment really was focused on clearing out products, repositioning that inventory with a much more aggressive markdown policy, which we don't think drives top line sales in a meaningful way, but allows us to kind of free up that space. So we took a very different approach. As technology is changing, we are putting some strong markdown principles in place in this business for first time that forces us to be responsible with inventory because of the opportunity cost. So I would say that I aggressively moved to a much -- a markdown program that was considerably different than what was currently in place because I don't want to carry inventory longer than x months and we look at it by category. So that was the first place of investment. Secondly, we tried, as we mentioned, several promotional vehicles, noticeably or more notably, I guess, is the $10 off $30 promotion that we ran through much of the quarter, which was intended to drive repeat purchases. So you remember that promotion, spend $30, get a $10 coupon when you come back, and you had to come back 2 days later or longer. It had a shelf life of about 30 days, and that was intended to drive traffic back. And we certainly saw that being a significantly play, but it certainly comes with high cost. The good news is the redemption on that program was significantly higher than we had anticipated, and the basket that came back with it was higher than we had anticipated as well. So we got some good reads. Now when you -- but when you couple that investment strategy with our traditional circular strategy and our markdown strategy, which was more aggressive than planned, that's the -- that's what kills you from a margin rate perspective because I'm not so sure that -- ideally, if we weren't clearing out merchandise, people weren't going to come back and clear out -- use their coupons on clear-out merchandise, for example. We were making some pretty dramatic changes in mix. I mean, we had -- I'll use one example specifically for you, but we believe that the category, the headphone category and music in general, was pretty significant to our growth. Having said that, we were carrying brands that we needed to clear out aggressively to make room for new brands, so we could play with our 3 meaningful partners: Beats, SOL Republic and Skullcandy. So by doing that, we put promotion on top of promotion, and I think that's something that we have to watch out for in the future, but I think it's a reality of the business when you're de-SKU-ing it. And so I think we have to be a little bit more aware of the duplicate investment strategy in Q3 and Q4 moving forward.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

If I could just follow up on that, just directionally, clearly, you look to be moving towards a point where the inventory is rightsized and the margin trajectory presumably normalizes as obviously, mix is quite moving around from a clearance perspective. Are we at that point yet as we've come through Q2 or is that still going to continue through a portion of the rest of the year?

Joseph C. Magnacca

No, I'm still -- we're still going through rationalization of SKUs and as our online business, which we're kind of referring to as our continuous channel platform, becomes designed and developed, we're definitely looking at supplementing our listing base in stores with significant online statements of merchandise assortment. And so that will continue third and fourth quarter until we get to that right size. The other work that's currently happening is that segmentation I referred to earlier. And I'd say we were on -- we are early days in terms of assessing the assortment on a by-store basis. I think we've got some big building blocks in place that are mostly national in terms of focus and maybe some regional, but we want to get down to a much meaner and leaner assortment by store. So that, in itself, will obviously force us to de-SKU or de-category particular stores and particular markets as we move it forward.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

And Joe, my final question, you refer to the whole store selling model and I think that relates in part to employee selling incentives. If you could just clarify what changes you've made as part of that process [ph].

Joseph C. Magnacca

Yes, I certainly can. And on -- in beginning of April, and as you know, Troy Risch joined our business in January of this year, and one of his first observations was the store experience wasn't what we wanted it to be. We were trying to wrestle your mobility phone out of your hand when you walked in and the reason for that was our compensation program was heavily skewed towards commissions on postpaid cellular phones. And the problem with that, obviously, was that over 80% of the people walking into our store aren't coming in for an upgrade or for a new phone, so that created an environment that was not meaningful. So having said that -- and truly not the environment we wanted moving forward, Troy and Telvin Jeffries put together -- we looked at that whole program and launched what we call whole store selling or 4-wall selling inside the store, which means our commission structure is equal across our total product portfolio. Regardless of what you sell, you will earn a commission. It's not just mobility based. And the way I like to view it is every SKU is equal in the store and every customer is equally important inside the store. That doesn't mean we don't want to sell you the mobility category because obviously, given the value of a mobility sale, the commission against that product is high, but so is the commission against Beats headphones or other high-end products. And I think, in April, I think our employee base was assessing if that was a good thing. And I think when they received their paychecks during the month of April, they clearly understood that it was beneficial to them inside the business. So we're really pleased with that change and really pleased with the response and we're -- I think that is what's being reflected in our Net Promoter Scores as well. Our employees have a Net Promoter Score of over 80, and we believe that this is part of the reason in our stores that they do.

Operator

Your next question comes from the line of Carla Casella with JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

I had one follow-up question on the inventories and the receivables. How much of the receivable decline was related to receivables from carriers versus receivables from Target?

Bruce Bishop

The receivables from Target, we said on the last call, were around $15 million from a reduction at Q1 to the end of Q2. And then, remember, on the receivables, we had the income tax receivable that was on our balance sheet at the end of the 10-K, at the end of the year, as well as at the end of the first quarter, and that was a little over $50 million. I think it was $55 million that was a reduction in the receivables.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. So was there a material change in the receivables from the carriers for the, I guess, for the contracts?

Bruce Bishop

Only that which would relate to a small decline in the units, as Holly stated, because fewer units is going to drive fewer receivables from the carriers for the upfront subsidy that they provide us or commission that they provide us.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, great. And then did you disclose the cost to remodel or to build one of the new store concepts?

Bruce Bishop

No, we aren't providing that information. It will vary store to store and depending on the location and how much of a remodel we're looking to do in a given location. So there's not a number that we can share with you that would be meaningful or useful for your efforts. But we've only -- what Joe said is we're going to focus the CapEx on new stores and remodels, but only on a small percentage of the estate [ph].

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, great. And then on the call, you commented that you intend to pay the convert down, August 1. But in the 10-Q, there was some language that made it sound more contingent in looking at financing options, I guess. What are the contingencies and what would cause you not to pay that down with cash in the next 1.5 weeks or about a week?

Holly Felder Etlin

I can't anticipate that there would be any contingency that would cause us not to pay the converts in cash as they are due. The language in the Q is somewhat prescribed by design and by accounting and SEC requirements.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, great. And then the gross margin weakness, it sounds like that was mostly in the CE category from liquidating product. Or can you say whether it was similarly weak across signature and mobility?

Holly Felder Etlin

I think it spans all 3 categories of the company. I think that was reflected in our remarks and for different reasons, as Joe previously discussed.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. And then just one quick last one. When does your Verizon contract expire?

Bruce Bishop

We don't disclose the details of our contracts. They're multi-year agreements and they renew at different points in time.

Operator

Your next question comes from the line of Dave Gober with Morgan Stanley.

David Gober - Morgan Stanley, Research Division

Joe, I was wondering if you could touch a little bit more on the labor model in the concept store. Obviously, the compensation model is changing, but if you look at that specific concept store, and I know obviously one location doesn't make a trend, but there does seem to be a significantly greater amount of labor there, it definitely seems. It's clear that you guys have spent time training the labor in that store. Is that how you'd envision the remainder of the fleet or is that something that you would envision seeing broadening out to different versions of the concept store and the quarter concept?

Joseph C. Magnacca

Well, I'll first touch on the point you made about training. Yes, there was an extensive training program, along with all of our carrier partners, as well as our OEMs and some of the new key initiatives where these folks were engaged at a much higher level to be prepared for that store. More importantly, I would say I think the quality of individuals in that store are some of our -- because of that training, but also because they've been selected. You have to earn the right to be in a new remodeled store in our environment, and part of that is self-learning and part of it is the formal training program. Certainly, you see a highly energized team that's very competent and knowledgeable on product, which is -- I'd say that the competency and knowledge part of it is pretty consistent across our network. I think you just have a little bit more personality in the store and that's something that we're looking for as we evolve the business. From a labor point of view, obviously, that store is actually a relocation from Columbus Avenue to Broadway. Certainly, we're -- my belief is, whether it's inventory or whether it's labor, you go in with a number and then work it back. So let's see how high, high is. And certainly, we knew that, that store is the first of many, so that labor model was certainly positioned for that purpose. Having said that, Troy, as he typically would, as he looks through several weeks and his team would manage that number accordingly based on hours of operation. It's actually interesting when you look at it, and this is maybe to the point that you're asking, we didn't realize, I think, in that store, how busy it would be during the day. We thought it would be more of an afternoon-evening store. And we also were quite surprised by the number of women that were shopping the store during the day. So this is really, the way I view that store, it's a living, learning lab relative to our customer and our service model. And as you know, we put a real focus on something that we call Texpert inside that store as well and creating that unique opportunity to sit down and walk you through the connected life model and making sure that all your technology commits [ph]. So we definitely have put our best foot forward relative to people and labor, and we'll model that moving forward based on demand at peak periods. What I would say to you, if we were to have opened that store based in our knowledge from Columbus, we certainly would not have put the amount of labor in during the day hours as we currently do today, but we think -- I actually think that's the right call. Now Troy will make that decision, as he normally would as part of his labor model scheduling plan, but I'm pretty confident that we did the right thing in terms of how we opened that location.

David Gober - Morgan Stanley, Research Division

Got you. And just going back to the cleared inventory during the quarter, can you give us any kind of magnitude in terms of how much that drove sales. And also, was any of that inventory previously marked down on the books? I mean, I know a lot of it had been legacy inventory, was there anything that actually had been written off and therefore, would have been pretty high gross margins? Or was it actually you were clearing through it, so it really did impact the gross margins [indiscernible]

Joseph C. Magnacca

Clearly -- certainly, by category, there's been adjustments made on book value of that inventory over time. But that's not the way we viewed it when we approached the markdown at store level. We looked at it on a store gross margin or store cost basis. I think, did it attribute? It's interesting. Dorvin and I had a discussion on whether it was driving sales from a top line point of view. You saw us run a lot of clearance events across our network in the months, I guess late May and early June, where we did table events inside our stores. I did not see an incredible -- let me actually put focus on an incredible lift against that initiative in a big way. I think it's -- from my perspective, in some cases, it may have actually traded people across a category. I'll use the example of headphones where we were clearing out, but -- so I didn't actually think that, that was really the -- what attributed to the top line sales. I really give 4-wall selling or whole store selling a lot of the credit and the focus in that in the actual quarter and our great employee base and what they've done with that concept.

David Gober - Morgan Stanley, Research Division

Okay. And one final question and maybe this is for Holly, not sure. But in terms of the refinancing options that you guys are considering or maybe the work that you're doing with Peter Solomon, what's the real end goal there? I mean, thinking about the capital needs of the business today, clearly, the balance sheet, you've talked -- you've mentioned several times that the balance sheet has some flexibility today. Is the goal about pushing out maturities, is it about raising capital for activities, accelerating store remodels? I mean, I guess I'm just trying to figure out what the end goal is there.

Holly Felder Etlin

Well, let me see if I can try to address it. Peter J. Solomon's mandate from the management team and the board is really to look at all of the above. The company wants to make sure that given its turnaround strategy and given where it's going to take the business over the next 12 months, that the financing that the company has on its balance sheet provides it with the optimum flexibility as against its assets. And we're not clear that, that exists in the existing financing agreements today. It was important to have a third-party expert come in and really take a hard look at the capital structure of the company and that's what's in process.

Operator

Your next question comes from the line of Mike Baker with Deutsche Bank.

Michael Baker - Deutsche Bank AG, Research Division

Just trying to follow up on some of the previous questions and trying to understand. This quarter, it seems like you took a big profitability hit as you cleared out some of that inventory. Just trying to get a better understanding as to where you are in that process with the inventory being flat year-over-year. It seems to me as if you're pretty much through the process, but you did indicate it would continue into the third and fourth quarter. But should we expect the margin declines to be similar, less than it was in the second quarter, et cetera? Are we going to start to level off?

Joseph C. Magnacca

I'll comment on the de-SKU-ing, I guess, first. Look, I think there's still a lot of work to do relative to duplication of SKUs and categories that are in decline that we're going to either minimize in our stores or even perhaps walk away from. Having said that, to your point on inventory, my plan always is -- and my conversation with the merchants goes something like this. To be able to afford a new category inside your store, you've got to create the room. And so therefore, my objective on inventory is to reinvest part of that inventory reduction back in categories that will bring in new customers, talk to the new trends. So I think you'll see our focus on SKU reduction more about creating room inside the store to allow for new categories to enter and moving some of those categories that are in decline online. So some of the SKUs that we'll remove from our business we'll remove physically from our stores, certainly still make available to our dealer franchise network and certainly have it online in our portfolio. And we put it through a filter that says, if it's a need-to-have-it-now product, then we obviously want it in one of our 4,300 locations. If it's something that you can wait for, we'll certainly have it shipped to store or shipped to home. But what we want to do is get those powerful categories that will create growth. And maybe the best way to explain it is, I'll go back to the example of products like Fitbit that are in our stores. When does a SKU become a category and one of the decisions we made early, as I joined this organization, was not to put these SKUs up on a wall, panel 22, row 7, SKU 4, but to actually start to make a statement. So you've heard us use power branding or category -- power category statements in our store. That's really the direction that I want to take the merchandising in-store. And to be able to do that, we obviously have to find room, which will obviously result in implications to inventory as we move forward.

Michael Baker - Deutsche Bank AG, Research Division

Well, then. Okay, but -- makes sense, but the follow-up to that then, should we continue to expect gross margin declines in the coming quarters as you -- it sounds like you're going to continue to clear out some inventory. Maybe there will be a lag between as you clear that inventory out and put in newer, higher-margin inventory.

Joseph C. Magnacca

Yes. I'd say the answer to that is -- if you're looking for yes or no, the answer is yes. The question is, does it need to be at that excessive markdown rates moving forward? It depends on the category and it depends on whether or not we're going to sell that product through at store level or to the online channel and pull it back toward EC. So it depends on the category and the SKU, and that's the work that the merchants are currently doing right now.

Michael Baker - Deutsche Bank AG, Research Division

Okay. One more follow-up, maybe for the CFO or for Bruce. Are there any one-time cash flow items that we should expect? I mean, we've got the Target thing done. I think you got the $56 million tax refund, according to your Q. Anything else that we should expect in the back half?

Holly Felder Etlin

No, no other one-time things.

Operator

Your next question comes from the line of Mary Ann Rosie [ph] with Stone Harbor.

Unknown Analyst

Could you talk about your working -- your peak working capital borrowing needs now that Target's out of the mix?

Bruce Bishop

What we stated in the Q is that it will range in the fourth quarter from $150 million to $250 million. And over the last couple of quarters, we've commented, it's probably lower, at the lower end of that range for the fact that Target is no longer part of the business and that peak occurs during the fourth quarter. With the September quarter end, you don't often see this because the peak would occur in the October-November time frame.

Operator

And your next question comes from the line of Anthony Chukumba with BB&T.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Kind of related to some of the questions that we've had earlier. What do you envision in terms of timing of getting down from the over 4,000 SKUs to, I guess, less than 3,000 SKUs? I mean, is that something that's going to take several quarters, a few quarters? I mean, how do you sort of think about that?

Joseph C. Magnacca

Yes, I'd say 2 to 3 quarters. Again, our objective is to move that inventory through without high cost. It really is our guiding principle on this one. Having said that, there are 2 natural times when we re-merchandise our store. One of them is the fall reset that we referred to earlier. So you can expect that a lot of the work or a portion of that de-SKU-ing will happen so that in the holiday period that we are -- we have the right merchandise in our stores. Then the next major realign in our stores is in the spring. So you can expect again that there'll be focus on de-SKU-ing for that period of time. So I'd say the September-October period and then clearly the March-April period, it will be our areas of focus in terms of solidifying SKU count.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Okay. And then just on a related question, so in terms of the markdowns you're going to need to take to kind of clear that excess inventory, I mean, is it fair to then assume that those will primarily be over the next 2 to 3 quarters as well as you do that sort of those resets and bring the inventory levels down?

Joseph C. Magnacca

Yes, I think the answer is yes, but I would maybe just take it up a level for a second. Getting rid of inventory doesn't necessarily mean markdown. And one of the things that we're heavily focused on as we remove duplicate inventory is we put a bunch of these SKUs on stop-by [ph] moving forward, so they can move through it at our normal -- with our normal turns. And as that SKU becomes depleted at store level, we're not replenishing against it, knowing that, that fall re-merch, or re-merchandising effort for the reset will allow for the re-planogramming of that store. So I just, I guess, I don't want people to conclude that if, in your mind, you think we're going to take out 1,000 SKUs, that there's heavy markdown on 1,000 SKUs. That's not the case at all. What it means is that we're going to responsibly manage out of those SKUs moving forward. And in fact, certain stores will maintain certain categories and other stores may not, which may allow us to transfer product to other stores that we believe those categories are appropriate for. And not every -- if you look at the Broadway and 81st store, not every one of our categories is in that store, for example. So there's a lot of good inventory that's not in that store, that is in other New York related locations and Queens and the Bronx and other areas that still have value. So we're looking at all of that as we move through. I just don't want people to jump to the conclusion that we're going to go to heavy markdown in every SKU immediately. That's not the case at all. We're trying to be as responsible as we can in terms of moving through this inventory. But understanding that certain product, as we make decisions, particularly across the chain, will require heavier-than-normal markdowns to clear it out.

Holly Felder Etlin

What Joe is referring to is a much more dynamic and changeable merchandising model going forward, more consistent with what you would expect a retailer who sells merchandise in these categories to have. And so that will be constantly refreshing the assortment, constantly adjusting what's going on as opposed to large changes which produce substantial margin swings.

Operator

Your final question comes from the line of Rosemary Sisson with Lazard.

Rosemary Sisson

I had a question about the wireless carriers and the new offers that they're making relative to phones and getting people to upgrade more frequently and if that has an impact on your working capital.

Joseph C. Magnacca

Well, certainly, let's talk about the new -- the changes that are happening. I mean, I think, first of all, I'd comment that -- I mean, all 3, AT&T, Sprint and Verizon, are all testing new concepts. Obviously, one of the other carriers started that rethinking relative to the postpaid business. And from our perspective, well, I kind of look at that and as things move from postpaid to prepaid, from an inventory point of view, we know that it's driven up the value of inventory on a prepaid model, but we also know that we can be highly effective in that space. From a working capital point of view, I guess, I know Holly and Bruce -- I don't see that there will be any major implication based on those changes. And I think what this also does, I mean, I think the changes that are happening and I would say to you that AT&T, Sprint and Verizon, I would really tell you that our relationship with them has been incredibly strategic, not to overuse that word today, but versus what it has been in the past, with top-to-top sessions with all 3 carriers. We like the fact that we play across 3 carriers in our model. That gives us huge opportunity to offer even further choice. And as we've said quite publicly, as there's more change in technology or in this case, change in the way you buy phones, we think RadioShack is definitely the place you go to fully understand the new models moving forward. So I -- we welcome it, we support it and there's really few people that can kind of explain all the models to consumers moving forward. So from that point of view, we're thrilled with where they're taking the business, specifically by carrier.

Rosemary Sisson

Okay. And then just one more, I guess from an overall perspective, you've been talking a lot about the offering and how it might differ by store and whatever. But if you could look out kind of 1 year, 18 months or 2 years, what would your optimal sort of sales by type of business be? I mean, have you moved way towards mobile from the past couple of years, what would you kind of envision? How would you envision that as a business overall going forward?

Joseph C. Magnacca

I'd take it out beyond our current corporate store split of business. And I would say that the dealer franchise network is extremely important from a growth perspective and as a revenue generator moving forward, obviously, particularly out of the international front. So we'll put a lot more energy and focus on that side of the business. Within our existing corporate store environment, today, we're 50-50, non-mobility versus mobility. Obviously, the change in postpaid versus prepaid in the mobility is changing that dynamic dramatically. Obviously, as I mentioned earlier, our intent is to grow the postpaid-prepaid model, but do so with respect to try to enhance margins. We're going to do it responsibly. But we really want to accelerate our non-mobility business at a much faster rate, including the development of, as we describe it, kind of unique propositions in private brand because we believe that's where we, as a business, will kind of return to our heritage, but more importantly, we'll have kind of unique offerings and create a much stickier consumer. So you'll see faster growth in non-mobility inside our 4 walls moving forward and you'll see obviously a lot more time and attention in our wholesale, B2B, dealer franchise and international businesses as we move forward.

Bruce Bishop

Thank you, operator. That concludes our call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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