Molly Salky – VP, IR
Julian Day – Chairman and CEO
Jim Gooch – EVP and CFO
Bryan Bevin – EVP, Store Operations
Lee Applbaum – EVP and Chief Marketing Officer
David Strasser – Janney Montgomery Scott
Matt Fassler – Goldman Sachs
Scot Ciccarelli – RBC Capital Markets
Michael Lasser – Barclays
Greg Melich – Morgan Stanley
Stephen Chick – FBR Capital Markets
Dan Wewer – Raymond James
RadioShack Corporation (RSH) Q4 2009 Earnings Call Transcript February 22, 2010 4:30 PM ET
Good afternoon and welcome to the RadioShack's fourth quarter 2009 earnings conference call. All participants will be in listen-only mode. (Operator instructions) Please limit yourself to one question and one follow-up so that we may get everyone's question during this one-hour call. Please note this event is being recorded.
I would now like to turn the conference over to Molly Salky. Please go ahead.
Good afternoon, everyone and welcome to the RadioShack investor conference call and webcast. We are pleased to be here today to provide an update on our progress in the fourth quarter and full year of 2009. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay of the webcast of this call can be found in the Investor Relations section of our RadioShack corporate website.
I need to remind everyone that we may forward-looking statements on the call today either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially.
These risks are detailed in our various filings with the SEC, such as our most recent forms 10-K and 10-Q, as well as our news releases and other communication. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made.
With me on the call today are Julian Day, our Chairman and Chief Executive Officer; Jim Gooch, Chief Financial Officer; Bryan Bevin, Executive Vice President of Store Operations; and Lee Applbaum, our Chief Marketing Officer. Julian will give us a summary of our business performance and trends for the fourth quarter and full year, Jim will provide further details on various aspects of our financial performance, Bryan will discuss the performance of our store operations, and Lee will provide an update on our brand building strategies and progress.
Following our prepared remarks, we have allowed ample time to address any questions you may have. Please limit your questions to one question and one follow-up so that we may get to everyone's questions during this call. Feel free to re-queue to ask additional questions.
With that, let me turn the call over to Julian Day, RadioShack's Chairman and CEO. Julian?
Thanks, Molly. Hello, everyone, thanks for joining our call today. As we said in our earnings release today, we are pleased with our fourth quarter and 2009 performance. The results, I think, point to solid progress on the strategies we set for our company, particularly related to our capabilities in the area of mobility and the knowledge of the product, and our skill in providing an unparalleled customer experience.
That said, of course, we have work yet to do in some areas of our business. As some of you who have followed us for a while may know, our focus began by strengthening the financial position of the company. Secondly, improving the quality of our operations and most recently and largely because we have achieved a level of financial and operational success, we have focused on revitalizing and contemporizing our brand. I'll spend a few minutes on these three points and then I'll let Jim, Bryan and Lee speak to each of their areas in more detail.
Firstly, many of you know that we've made significant progress in improving the financial strength and flexibility of our company. This has been accomplished through a highly disciplined approach to cost control through focus on profitable sales and a strong focus on the strength of the balance sheet. In 2009, we were able to increase operating margin by 100 basis points to 8.6%. We further improved our net debt, which stands at cash in excess of debt of over $200 million.
Operationally, we have invested to make improvements to our strong physical plan and to raise the quality and expertise of our sales teams. Physically, we've worked to make ourselves easier to shop through the store layout, displays, packaging, product assortment. And you will continue to see improvements as we move through 2010.
We believe that our scale with over 6,000 stores and dealer outlets combined with our store format, comfortable store size, and carefully thought-out product assortment and helpful collaborative sales experts creates a unique competitive advantage for our company. Bryan is going to talk more about store operations in a moment.
Lastly, our brand. We have begun to make inroads at aligning our brand perception with the progress we've made as a business. In our case, the brand perception was lagging the business progress improvement. The launch of our new brand creative platform, THE SHACK, in the third quarter has captured the attention of consumers, signaled that a change has occurred and ultimately, is beginning to change the way consumers see us, particularly in the area of mobile technology. We have carefully balanced brand building with products and service offerings and the advertising mix and have some exciting plans for this year, which Lee will speak to in a moment.
So a few words on mobility. Several key events in the fourth quarter helped us to reinforce our leadership in the areas of mobility and innovative technology. First was the addition of T-Mobile as a third national wireless carrier to our stores. Now, with the combination of AT&T, Sprint, and T-Mobile, we have a strong diverse selection of carrier offering. Importantly, since adding T-Mobile, we have been able to realize growth from all three of our carriers.
Additionally, gaining national distribution for Apple's iPhone has further solidified our strong position in mobility. The iPhone rollout is nearly complete. We are currently implementing several hundred stores per week with a plan to have the product available in about 3,000 stores by the end of March. We've been methodical in our rollouts so that we could focus on training our team to make sure that our customers receive the high-quality service experience that they've come to expect from THE SHACK.
The iPhone product launch is a great example of the traction we are seeing with our mobility strategy, an acknowledgement that our financial and operational strength, as well as our brand evolution is being recognized by key vendor partners.
Finally, in October, we launched a pilot mobility kiosk program with Target Corporation. The pilot covers about 100 stores and we are pleased to say that we believe the project is going well. Target is clearly one of the most important and respected retailers in America and we are hopeful we can continue to work together with them in the future.
These successes are of course being achieved through tremendous team work, dedication, and hard work on the part of RadioShack employees. I'm immensely proud of them and thankful for their dedication. Our business success and strength has also improved our workplace culture, creating new challenges and new opportunities for our teams. I am pleased with our progress towards becoming a truly terrific place to work.
Looking forward to 2010, we've set two key priorities, first, to build on our success in the wireless mobility business and to ensure that we have all the right elements in place to sustain and capitalize on our competitive advantage and to provide growth in the future; and second, of course, is to improve the trends in business platforms that are currently underperforming. I'm going to speak to each of these priorities in a little bit more detail.
First, with regard to sustaining growth in our wireless mobility business. We are focused on maintaining our position as the destination that offers genuine choice for customers who want friendly, expert help in getting their complex decisions right the very first time. We see several opportunities for continued growth in this category. First of the inherent strengths and competitive advantages that we bring, which we think are fairly well understood, our convenient locations, our easy shopping experience, our award-winning customer service.
Additionally, there are advantages we bring that we believe are not yet well understood and therefore, opportunities to raise awareness and understanding of our value proposition with our customers and potential customers. What I mean by this is the fact is that our mobility assortment has been and will continue to be priced aggressively and is fully competitive with any alternative retailer or carrier. Also, we offer the full complement of rate plans that are offered by carriers and we offer best-selling handsets from each carrier.
Our focus on integration and growth in the wireless mobility area required significant team resources and bandwidth from our organization. With this success, unfortunately, came some loss of focus in some other business platforms. Candidly, we took our eye off the ball in those areas. We've rebalanced our resources today and have plans in place to improve these businesses. As a part of that improvement, as many of you may be aware, our Chief Merchant position became vacant late last year and we are actively working to fill that important role today.
Now, to those improvement plans. One area in transition has been our power platform, which we completely restructured during 2009. Earlier this month, we completed the transition to our new power category in all our stores. The display is now 12 to 18 feet of wall space fully assorted with new emphasis on our Enercell private brand options available in all power products, rechargeable and alkaline batteries, innovative power strips, and other power related products.
The visually distinctive green and black Enercell brand replaces the previous RadioShack brand we used and presents a much more coherent merchandising approach. Our brand message on Enercell is, quote, "Life Empowered." These products offer great performance and a great value for the customer. We are pleased with the power planogram and optimistic that a comprehensive, consistent value-focused offering will help us to return to growth in this platform, one of course that has traditionally been a core strength of our brand.
During 2009, we also spent a significant amount of time creating and developing our new private brand assortment. Our product selections try to balance between leading national brands with exclusive private brands. Each of our private brands carries a specific brand promise of value proposition and is responding to customer demand. In addition to Enercell, we've included AUVIO for audio and video components and accessories, Point Mobl for mobility accessories and of course, Gigaware for personal computing hardware or accessories.
Brands have begun to roll out to stores and will continue throughout the year. You will see significant new offerings in the accessory category along with the technical platform of modern home. We think you will see a new shopping experience, new brands, and new trademarks during 2010 at THE SHACK.
So before I hand over to Jim, let me close with a few broad comments on the use of capital. As I mentioned earlier, we have been and we will continue to be highly disciplined in how we allocate capital. We are pleased with the capital structure and financial flexibility we have in place today and we will continue to watch the economic environment closely to evaluate our (inaudible).
With that, let me turn the call over to Jim for his comments.
Thank you, Julian and good afternoon, everyone. To start out, I'll recap what some of the highlights from 2009. Our results showed solid top line growth, showed improvements in gross profit dollars and gross profit rate, our SG&A reflects investments in both people with compensation and training, but also on advertising through our brand repositioning with the new SHACK campaign.
The result of all of this was our ability to deliver strong bottom line growth. We generated a positive cash flow, we continue to bolster our financial strength of our company and through continued improvement of inventory productivity, at the end of the year we are pleased with both the quality and the quantity of inventory. Overall, the year, I'd characterize is showing strong results from many improvements, the direct result of all the hard work of our team members, but still many opportunities ahead in 2010.
Now, I'll cover some of the numbers. Today, as Julian mentioned, we reported net income for the fourth quarter of $76 million. That's $0.60 per share, up from $60 million or $0.48 per share in the fourth quarter of last year. For the year, we earned $205 million of net income. That's a $1.63 per share and that compares to $189 million or $1.47 per share last year.
Total revenue for the fourth quarter was $1.32 billion. That's an increase of $60 million or 5% over the same quarter from last year. For the full year, total revenues were $4.28 billion. That's an increase of $52 million or 1%. These numbers include our comp store sales increases of 6.1% for the quarter and 1.3% for the year.
Quickly, take a look at the kiosk business. Our revenues there were down $12 million for the quarter and down $34 million for the year. I think many of you are aware, but we ended the Sprint branded kiosk arrangement late last August and this kiosk reduction was a result of these closures, partially offset by the continued improvements that you see in the Sam's Club business. And we showed strong double-digit comp store increases for both the quarter and the year in the Sam's Club kiosks. We've now extended that agreement and the new agreement will now run through June of 2011.
Within the kiosk revenues, we also benefited from what Julian mentioned earlier, which is our ongoing kiosk tests in approximately 100 Target stores. Through both the new Target agreement, as well as the extended Sam's Club agreements, we've also reestablished our working relationship with Verizon Wireless and we believe by having partnerships with now all four of the major postpaid wireless carriers only continues to support our position as being the leading advocate for consumers' wireless and mobility needs.
I'm going to briefly discuss some of the details of the sales performance when you look at it from a product perspective where wireless was clearly the key component of growth, we increased 56% for the fourth quarter and 25% for the year. During the quarter, we saw improvements in our postpaid business, not only from Sprint and AT&T, but also from the addition of T-Mobile as an additional national postpaid provider. We began to carrying the T-Mobile in all of our stores nationwide in August of 2009.
In addition to the strong postpaid business, our no-contract business also continued with its strong trends, increasing more than 70% for the quarter. These increases in the wireless business were partially offset by declines in the standalone GPS products and this trend in the GPS product that I think was experienced industry-wide where most retailers not only saw a softness in unit demand, but also decreases in ASP.
Turn over now to the accessory platform where the decline for both the quarter and the year were primarily due to the sales of the digital converter boxes. In the quarter, sales of the converter boxes were $13 million, that's down from $54 million a year ago. And for the year, the sales of the converter boxes were $170 million, which is down from $205 million in 2008.
If you take out those converter box sales, excluding the converter box sales, accessory platform sales were down mid-to-high single-digits for both the quarter and for the year. For the year, the decrease was a result of wireless accessories, media storage, and music accessories. However, when you take a look at the quarter performance, we are pleased to see an increase in the sales of the wireless accessories, which directly points to our improved ability to provide a full solution for our mobility consumers.
In modern home, revenues were down 9% in the quarter, but up 2% for the year, netbooks were the big story here. However, the gains we realized in the netbooks in the fourth quarter were offset by declines in the portable DVD players and in our television business. We are far less promotional in the fourth quarter with our TV business. For the year, netbooks led the sales gains again, followed by increases in the VoIP products. But for the year, we saw positive trends in the television business.
Within the power platform, we experienced declines in revenues for the quarter of 11% and 10% for the year. This performance reflects a couple of things, not only industry trends in some of the power categories, but also a negative impact during our transition to our new Enercell private brand. Julian mentioned this earlier, we recently completed the transition to our Enercell private band and as a result, we are anticipating an improved trend in the power platform during 2010.
Growth in the service platform was solid in the fourth quarter, up 13% and were up 17% for the year. The growth was primarily due to sales of prepaid wireless airtime, but also includes the launch of our new ConnecTech service program. While still in a startup mode, the program offers customers a fast, full service solution for help with such products as TVs, computers, home theater systems. Bryan is going to explain on this a little bit later and he will discuss how this service is integrated within our store operations group.
Final point on sales. When you look at store count, we ended the year with 4,476 company-owned stores in the U.S., that's an increase of 23. Kiosk ended the year at 562 units, that's down 126, I talked earlier about the closures of Sprint and also the new Target stores. And then in Mexico, we ended with 204 locations. On the dealer side, we ended with 1,308 – 1,318 locations, which is down 90 from last year.
Move on now to gross profit. We increased $53 million or 10% in the fourth quarter. Our margin rate was 43.9%, that's up 210 basis points from last year. For the year, the gross profit increased $40 million to $1.96 billion with a margin rate of 45.9%, which is up 40 basis points. Positively impacting the gross profit was an improved product mix combined with fewer markdowns, especially in the fourth quarter where as a result of our more productive inventory management, we realized a higher sell-through on seasonal products that required fewer clearance markdowns and overall, producing an improved bottom line.
Take a look at SG&A expense in the fourth quarter. It was $426 million or 32.3% of revenues. That compared to $402 million or 31.9% of revenues in Q4 of 2008. For the year, SG&A expenses, they were essentially flat, about $1.51 billion. The SG&A rate was 35.3% in 2009 and that's down 90 basis points when compared to 2008.
In the fourth quarter, the SG&A expense primarily relates – the growth in SG&A primarily relates to the investment in a couple of areas, employee compensation and an increase in spending relating to the new creative platform, THE SHACK. The higher compensation reflects both our increased focus on store training, as well as an increase in incentive-based compensation and that's directly related to our strong performance in the wireless platform. These couple of increases were partially offset by the reduction of less productive advertising programs as both our marketing and finance teams, I think, continue to do an excellent job of optimizing our video mix and maximizing our returns.
When you look at the full year, the factors impacting SG&A expense are similar, however, where you see a similar increase in performance-based incentive comp for the full year, you actually see a reduction in advertising expense. Despite the increased brand spend during the fourth quarter that I talked about, through the first half spending reductions, our advertising expense for the full year was reduced by $22 million.
The majority of the spending reduction came in the second quarter of 2009 when reduced advertising, especially the brand spend in preparation for the re-launching of our brand in the third quarter. We obviously don't expect the second quarter reduction in advertising expense to be repeated in 2010. For the full year 2010, we expect advertising expense to be consistent with prior years as a percent of sales in the 4.5% to 5% range.
We've discussed this in the past, but we've made significant progress in the area of cost control within our company and we continue to realize significant benefits from what I would call the heavy lifting associated with the reductions, especially the reductions that you've seen over the last few years. We've now established a culture of disciplined SG&A management and one that's far more about day-to-day management than it is about large-scale, major event-driven cost cutting.
I think, importantly, this achievement allows us to focus on other opportunities within our business and going forward, I'd characterize our cost opportunity again as less about looking for the large cost cutting opportunities and more about continuing to look for opportunities to improve our business through improved operational productivity.
Now, I want to conclude with a couple of comments on the balance sheet and working capital and then I'll turn it over to Bryan for a few comments on store operations.
During 2009, as I mentioned, we continued to build financial strength of our company and it's clearly evidenced by the balance sheet. I mentioned earlier our continued improvement in our inventory management. We are pleased with both our level and quality of inventory at year-end. We also ended the year with a cash balance of $908 million. That's an increase of $93 million compared to year-end 2008. A decrease in both the cash and the debt balances, we repurchased $43 million of bonds during the year. All of this combined with our strong performance has allowed us to further improve our net debt to a negative $239 million at year-end.
Our balance sheet does reflect a shift in our sales mix towards the wireless business and I thought I'd spend a couple of seconds helping you understand the impact. When you look at the wireless transaction, it's not a typical retail, it's not the typical consumer electronics transaction and really as a result of this, it has impact on the balance sheet, which is different than what the typical CE transaction would.
Specifically, you will see an increase in inventories and you will see an increase in accounts receivable at year-end, the costs of which are first – the inventory unit cost, which for the most of the postpaid devices, it tends to be a higher dollar value than our typical transaction, especially when that transaction includes the smart phone, which – obviously, an increasing percentage of our transactions include smart phones.
During 2009, we also added T-Mobile to our offerings and I think both the T-Mobile addition, as well as the inventory unit costs, both of these together not only add to our inventory assortment, but also added to our overall inventory carrying cost.
Also as a result of the commission and residual models that are inherent within the wireless business, more dollars tend to remain on the balance sheet and accounts receivable, which if there were more typical retail transactions, they would be converted to cash earlier. As a result, our cash balance tends to slightly trail the strong performance you are seeing in the income statement. However, even with these shifts in the balance sheets and the shift in our overall business, we still remain very, very pleased with the quality of balance sheet at year-end.
Briefly on CapEx, we spent $81 million for the year. The spending was focused on stores and technology improvements. And for 2010, we anticipate a similar focus, but we are looking for capital spending to increase in the range of $100 million to $120 million.
Finally, a couple of comments on the use of cash and the use of capital. Obviously, over the last year and a half, not unlike all retailers, we've experienced challenging and uncertain economic conditions to operate in. Through the improved performance of our company, we've been successful on accumulating a strong cash position, which we believe was prudent to maintain during those uncertain economic times.
As we now become more and more comfortable with our business performance, even in very adverse economic circumstances, we are continuing to analyze alternative uses of this cash and possible uses could be an addition to the internal projects. You've seen us deploy cash to acquire full ownership of our Mexico operations. We've also repurchased shares and reduced capital to retire debt. And I would say that any and all of these represent types of investment opportunities we'll continue to consider, we'll continue to evaluate, and continue to opportunistically take advantage of.
With that, that concludes my prepared remarks and I'll turn the call over to Bryan to discuss store ops.
Well, thanks, Jim and good afternoon, everyone. I'm going to focus my comments today on what we've accomplished in store operations over the past year and where we see ourselves headed.
The store operations team is accountable for the sales and service components of the brand promise, a promise which is embodied in THE SHACK positioning. And in 2009, our focus was on maximizing our store productivity by making our stores easier to shop, increasing employee training, and by integrating the brand messaging into our store environment.
And I have to say that, yes, I believe that throughout the store teams demonstrated a capacity to adapt and manage multiple new business opportunities, not least of which included the addition of T-Mobile, the Apple iPhone, and the continuous innovation in technology in the mobile and wireless categories, all whilst delivering a high touch, high service experience for our customers.
And as we continue to move our store experience towards a best-in-class service level, we've really worked to solidify our disciplines and practices around the store operations and employee training. Now, one of these disciplines which we fully institutionalized in 2009 is a program that we refer to as our non-negotiable standards and that's our promise to our customers and our employees about how our stores will look, how our merchandise with be assorted, and how we deliver that customer service. This program really does set the foundation for a consistent store experience.
Now, additional focus on employee training will also service as a foundation for store experience. And last March, we added training directors and training managers in each of our field operations areas to help deliver and execute training programs and initiatives to our sales teams. Other training initiatives include new employee orientation programs, further refinement of mobility training as new products are introduced to our stores, and redefine career pathing for our high potential employees.
And let me just say further to Julian's earlier comments about the workplace culture. I'm delighted to be able to tell you that we've seen staff turnover trends improve over each of the past 13 months even whilst we still continued to upgrade the talent. And that improvement really does enhance our ability to deliver on our sales and service promises.
Now, Jim already referenced this, but let me talk a little bit about the detail on ConnecTech program, which is another good example of the steps we've taken to add services to our assortment and really further enables our store teams to be responsive to customer needs. We partnered with AT&T on a program that offered in-home installation and technical support service and our customers can get assistance with as little as 24 hours' advanced notice on a wide variety of products. With ConnecTech, we offer many solutions at different price points, all aimed at making the RadioShack experience more meaningful and complete to our customers.
Now, our promise for the second half of the year also includes the implementation of an updated and improved labor planning system. Now, the new system will be faster and easier to use at the store level. It will take into account the different transaction types, whether it's self-select, assisted self-select, or full service transactions, and it will allocate labor according to that transaction mix. To also integrate traffic count information as well, we really do expect this more refined system will improve the customer shopping experience, store productivity, in addition to driving conversion and lowering the walkout rate.
And further adding to Julian's comments about the new power platform assortment, I mentioned that the new power wall is clearly a very positive move towards making our stores easier to shop. Our battery assortment is now clear, consistent, and comprehensive, making it easier to navigate for both the customer and our sales associates.
Let me now spend a minute on our Mexico operations. As Jim mentioned, we ended the year with 204 stores in Mexico. We also plan to add an additional 12 net new stores this year. And since our full acquisition of the Mexico business, we've put in place many of the operational disciplines and practices used across our U.S. store base. And this year, we will move very quickly to drive training and certification programs, improve visual merchandising and the consistency of the store experience and appearance. We'll also grow the mobility business in Mexico this year and we really are excited about the opportunities that this important market has to offer.
And finally, a few comments on our network of more than 1,300 dealer locations. The dealer performance in 2009 largely does reflect the impact of the economy and in some cases, limitations on their access to credit. And this year, we will put in place a more focused support system for our dealers, both at the central office and in the field, aimed at helping them do business with RadioShack on an easier level.
We will provide you with information and analysis to help you make data-driven decisions to really assist in things like investment management, ordering, all of that kind of stuff around that business. And all in, we really do expect the support to our dealers to benefit sales trends in the very near term and to benefit our dealer relationship and business structure over the long term.
And just before I hand off to Lee Applbaum, our Chief Marketing Officer, I'd like to add that the rebranding efforts lead by the marketing team have generated a tremendous amount of enthusiasm and excitement amongst our store associates, to say that everyone has rallied around the brand's enhanced visual presence and it's certainly been a powerful conversation starter with our customer.
And with that said, I'll now turn the call over to Lee.
Thanks, Bryan. 2009 was an exciting year for the RadioShack brand. After nearly a year of exhausted brand research and analysis of consumer insights, as well as the selection of a new creative agency of record, we re-launched our brand with the new creative platform, THE SHACK.
The rebranding impacted virtually every associate and consumers facing touch point from national media including TV, print, digital and web assets to all in-store signage, giving our stores an immediate facelift with a brighter color palette, as well as color conventions for each category, making the stores easier to shop. Each aspect was updated with THE SHACK DNA, giving our brand a more contemporary look and feel and calling out more clearly our leadership in mobility and innovative technology, as well as enhancing the prominence of leading national brands and their respective equities.
Ultimately, I believe our creative approach cuts through the massive advertising clutter with its distinctive Shack aesthetic and our consumer research supports the fact that simplicity of the messaging, which is conveyed in television to the exclusive use of 15-second spot, it's easily recognized and understood.
Transforming a brand is a journey though and not a discrete act. But we remain very pleased with our early results and insights and we will continue to build on THE SHACK platform in 2010 and beyond. As Bryan said, our associates have not only supported the rebranding, but have embraced it, creating a legion of brand evangelists, who are passionate about our vision and who are committed to the customer experience.
In a strategic move to accelerate the conversation around our brand transformation, we announced our partnership with seven-time Tour de France winner, Lance Armstrong the formation of Team RadioShack, as well as a critical relationship with Lance Armstrong's foundation LIVESTRONG. Together with Lance, we've made a very focused commitment to LIVESTRONG in the global fight against cancer. With our over 35,000 associates and approximately 31 million unique customers every year, RadioShack gives LIVESTRONG a grassroots platform with which to attack this terrible disease.
Over time, we expect our partnership to extend well beyond traditional point of purchase collections, which I should note incidentally amounted to more than $1.3 million, collected $1 at a time last holiday season, to include such things as exclusive LIVESTRONG branded merchandise and even the creation of a LIVESTRONG resource center in our stores.
From a brand standpoint, Lance Armstrong continues to have massive consumer appeal with a popularity rating that tops legendary figures like Bono and Paul McCartney. Lance's intense passion, focus, and winning sprit all inspiring attributes that our associates, consumers, and our brand can rally around. We also want a partner who embodies the mobile lifestyle. With more than 2.4 million Twitter followers, Lance is a pioneer in activation through social media and is passionate about the latest mobile technologies.
Our pro tour cycling team all rely on mobile and innovative technology on and off the bike as they compete around the globe. This very real and organic connection to our brand will serve as the foundation for advertising concepts including television, centered on Lance and the team, that you'll see in market beginning in late March.
The buzz surrounding THE SHACK re-launch and the partnership with Lance and the team has been tremendous, generating already nearly 1.3 billion media impressions for RadioShack since July, which is a four-fold increase over the prior year. Moreover, the tone in the buzz has been very encouraging, moving from what I describe as cautiously skeptical during our launch to energetic and strongly enthusiastic this past holiday. These sentiments have been shared by our vendor partners who will play a vital role in supporting our advertising initiatives.
As I said earlier, brand transformation does not happen overnight, but today we find ourselves in a unique position to have a company with a robust balance sheet and a brand that's moving in a very positive direction, supported by a new creative platform and aligned with an inspiring iconic figure like Lance Armstrong. We will continue to evolve and build our brand for the long term, balanced with compelling short-term reasons for consumers to interact with our brand day-to-day. This is the same challenge that all retail marketers face and one which we take very seriously.
Moreover, we will continue to evaluate and refine our advertising investment. And as Jim said in his comments, we continuously work to optimize our media mix and maximize our return on investment.
Thanks for your time and let me turn the call back to Julian.
Thanks, Lee. So I just want to conclude by saying that operationally and financially, we are solidly in a position of strength. We have now developed action plans to improve underperforming businesses and we have a high degree of confidence in our ability to sustain our growth in the wireless and mobility categories.
Our brand building programs have gained recognition from consumers and our vendor partners and have helped to further energize our employee teams. I'm happy with the progress we are making at THE SHACK and excited about the opportunities for growth for our company.
So with that, now, we will open the call up for your questions.
(Operator instructions) Our first question comes from David Strasser at Janney Montgomery Scott.
David Strasser – Janney Montgomery Scott
I just wanted to follow up a little bit more on the buyback. You talked about – you seem to be getting a little bit more comfort there, the balance sheet looks really, really strong. I mean, can you just give a little bit more thought about why you still haven't done it yet and a little bit more about what would get you over the hump to do a little bit more?
Yes. And I'm probably going to ask Jim to respond to that. Other than to say that – from our point of view, David, we remain exceptionally focused on making sure that we have all the flexibility we need to operate our business in whatever circumstance both the economy and the competitive offers. And so what that means is that we like the flexibility we have, as Jim said earlier. We are currently looking and evaluating all of the opportunities outside. But at this point, we are not in a spot where we can communicate to you and others exactly what our hierarchy of opportunity is.
No, I think that's right, Julian. I think, David, all the options that we looked at are all definite options that we are continuing to analyze. I don't think we want to go into any more detail on any of them at this point. But we feel that the financial strength that we put this company in puts us in excellent conditions to hopefully opportunistically take advantage of any and all of those options.
The next question comes from Matt Fassler at Goldman Sachs.
Matt Fassler – Goldman Sachs
Thanks a lot and good afternoon. I want to ask you about the Target kiosk test. If you could give us a little more color on what you are seeing there and what the path would be to growth of that initiative?
Yes, okay. Well – and I think what I may do is maybe ask Bryan to talk a little bit more about that. Obviously, as I said earlier, we have 100 stores in test right now. We believe these – that that test is going well, we like the results of that test. And as I said earlier, from our perspective, we would like to see that relationship grow in the future. And obviously, we like it particularly because that growth will come with a highly respected partner in Target. Bryan?
Yes. Julian, what I've got [ph] is a couple of things around it. One is that we – you saw that we did operationalize that test with Target pretty quickly. So it demonstrates our ability to do those kinds of things and at the same time, produce results at or better than we expected certainly. Now, in terms of the long-term relationship with Target, I'm not going to guess what Target will say about that. I can tell you from our perspective, we are happy with this and we continue to believe that we are in good shape relative to the expectations we have as a business.
The next question comes from Scot Ciccarelli at RBC Capital Markets.
Scot Ciccarelli – RBC Capital Markets
Hey, guys. How are you?
Scot Ciccarelli – RBC Capital Markets
Excellent. Julian, you kind of referenced your working relationship with Verizon. Can you expand on that at this point? I mean, is that – is it realistic to believe we could see Verizon back into the RadioShack stores? Is that the path where this could take or is it just way too early in that process?
I would say it's really a little early for us to come to that conclusion and in particular, obviously, I'm not in a position where I can sit here and tell you what the future holds. What, I think, we meant to underline is that we value, as you would expect with the strong mobility business, having relationships with all of the major players, all of the major carriers here in the U.S. and we are happy that – for to have had the opportunity to add the relationship to – with Verizon to that portfolio of relationships.
Let me just ask, is there anybody – Jim, do you have anything to add to that?
No, no. I think that's right. If you go back – and speaking of timing, obviously, we just added a third carrier in August of last year and so putting three carriers going from two was a significant move, not only from our employees' perspective, but also being able to effectively communicate three postpaid offerings to the consumers and so we are evaluating that and then bringing Verizon on in the key – as to Julian's point, gives us the opportunity to reestablish that relationship and then we will analyze and decide where we go from there.
One thing, Scot, maybe before moving on to the next question I’d say is that I did happen to mention in my comments that we are happy to be able to report that even with the – this addition of T-Mobile to our brand, that all of the carriers that we represent did trade positive trends last quarter, which to me I think underlines our progress towards being a real mobility destination and of course, I'm very happy to be –
And I think that's an important point because I think you've heard us talk to many of you before about how we believe that adding that third carrier was to the better business model and we believe that getting ourselves a better business model was going to allow all of our carriers to participate with a more effective and a more productive business model and where we believe that, we didn’t know that answer until we rolled out T-Mobile and we are happy to report that that's – that the business has proved that and to Julian's point, I think all three of the carriers have benefitted from that over the last six or seven months.
The next question comes from Michael Lasser at Barclays.
Michael Lasser – Barclays
Good morning – good afternoon, thanks a lot for taking my questions. A couple of them actually. Number one, can you talk about how the economic model is going to change where you get a disproportionate amount of your growth from the wireless business? It seems like based on that, in the fourth quarter, SG&A increased year-over-year on a 6% comp increase. So we didn’t see leverage there where you might expect. And also, maybe you could talk about the gross margin profile, if again you get a disproportionate amount of growth from the wireless business.
And second, what can you do to reinvigorate the rest of the store? Might some of the traffic that's being driven by the wireless business benefit the rest of the segments, because it seems like this was the second quarter where there is some underperformance in the other categories? Thanks a lot.
Yes, let me, Mike, maybe begin with the second and then since Jim already dealt to some extent with the economic model changes as a result of a growing part of the business being represented in mobility, I'll ask him to expand on his comments.
But in terms of reinvigorating the rest of the store, yes, absolutely. I said, I think, a couple of times in my comments that we were disappointed by our ability to perform in the power platform this last quarter. So as we have just recently rolled out a whole new planogram there, we believe that the Enercell brand (inaudible) stronger from the brand presence point of view and what we have in store.
And it is primarily – as you know, we are very disciplined I think about our approach to fixing problems. We have, I'll say modestly, a good track record of success in achieving what we set out to achieve and that's the reason why we have a high degree of confidence internally that we will succeed in fixing the problem, which as you point out, has been with us the last couple of quarters. But we think we now have a response to that, which will allows us, to your point, to leverage the opportunity which is provided by all those folks in our stores, who are now starting to really think of it as powerful mobility destination.
So with that, Jim, maybe I could ask you to take the first part of Mike's question.
Yes, sure. And I think the shift to the wireless business – or a stronger wireless business impacts in a couple of different spots and I think I mentioned earlier the balance sheet shifts and there is clearly an impact there with the receivable balance and with the inventory balance and maybe a timing impact that you will see from what you might anticipate being a cash balance.
Now, as it relates to the mix of the business and the impact on gross margin, fortunately, the wireless business is a very strong gross margin rate and a very gross margin dollar business. And so it isn’t as though we are shifting to a lower-rate business like televisions or like laptops. So where there could be some mix impact there, it might not in all instances be as high as our average. We believe that the strong wireless business is still going to provide us with a very nice platform to drive gross margin dollar growth.
The other point that you made as far as how it might impact other businesses, I was pleased to say – and that's the reason I put in the comment in my prepared remarks as to, in the fourth quarter, we did see a growth in the wireless accessory business. We need to improve our ability to attach those products to that end product to the postpaid and to the prepaid products and I think in the stores and with our assortment with the merchants, we are becoming more and more efficient and I think you'd see that in the fourth quarter performance of the wireless accessories.
But Jim, just add to – on the SG&A for the fourth quarter. I'll tell you that, we really did picture it for the service component of wireless from last transactions; clearly it's a high touch transaction, a lot of complexity around decision and support, et cetera. And we did do incremental training, we also made sure that we were appropriately seasonably staffed to make sure that our conversion rate would either remain flat or go up, which it did and still make sure that we took care of those last transactions and the self-select and self-select wireless transactions. So you saw incremental training in the fourth quarter against those initiatives.
Yes. And just to add very briefly, obviously anytime that you introduce a whole new carrier to your lineup, there is going to be a certain amount of incremental training.
The next question comes from Greg Melich at Morgan Stanley.
Greg Melich – Morgan Stanley
All right, thanks. I wanted to follow up on how the wireless business is evolving since you've added the third carrier. You said that you are up strong 50% in the fourth quarter. Could you describe a little bit more about the mix within that? Are you seeing – is it traffic or is it really just improving the mix of the existing carriers or is it actually selling more handsets from them? And then I have a follow-up on that as well.
Well, Greg, I'm not sure that I can give you the numbers on that. I don't know whether Jim, you can talk at all to – ?
I don't have the specifics in front of me.
So rather than take an answer there, we ought to get back to you as to what the specifics – mix is obviously a somewhat complicated thing. You have mix between carriers, you have mix between prepaid and postpaid, and then you have mix between smart phones and regular phones. So I think in order for us to provide you sort of a good sense, I think we need sort of a better understanding.
Yes, without – and the specifics – obviously, we are seeing unit growth, but there is clearly a mix shift going on not only within carriers, but between carriers and I don't have the details in front of me.
Greg Melich – Morgan Stanley
Do you say it's unit growth and average revenue per unit growth?
Yes. There is clearly some mix shift going on in there. But yes, we have seen nice growth.
Greg Melich – Morgan Stanley
And then maybe as a follow-on or I'll ask it a different way, as you get ready to sell the iPhone, could you just update us on where you are in that rollout and how you would expect that to change this dynamic as well, if at all or if you think there is any cannibalization from the iPhone or are your assumptions now that it will actually be all incremental?
Well, we are still in the middle of that rollout. So I don't think we are going to comment on where we are anticipating that ending. But we – I think we said in our remarks, we are anticipating the 3,000 stores being done by the end of the quarter. We are certainly going through training on the store op side; we are anticipating that being an important part of our mix. But I don't think we are going to comment as to how that could or couldn’t cannibalize other pieces of the business.
Just probably one addition to my response to clarity for everybody on the call. To the extent that we choose to go ahead and share those breakdowns, we are obviously trying to making sure that the share – not breakdown (inaudible).
The next question comes from Stephen Chick at FBR Capital Markets.
Stephen Chick – FBR Capital Markets
Hi, thanks. Just the – actually a question there to follow up on the iPhone specifically. Can you speak to whether – as I recall, the announcement was pretty small and I don't know – in early November, and I wanted to clarify whether it helped wireless sales for the quarter and?
And then I think second related to that, as we get further into the 2010 here, Apple I think normally comes out with a newer version in the summer, call it, I don't know, June, July, August. And now that you are indirect seller – indirect seller here, can we – kind of how confident that you will be viewed head-to-head with other indirect sellers if and when they elect to announce further versions and will – can you – will you be in a better spot say next to a best buyer or other competitors to get your allocation of the new one once it's out in the market?
Yes, I think we can be fairly crisp in responding to both of those. The first is that in terms of total wireless sales for last quarter, I would say that you are correct that we had rolled out only a few stores during that quarter. We just wanted to make sure we had absolutely everything right, turned out we did. And we are now, as we said earlier, going full ball, rolling that device out to our stores. But I confirm that in last quarter, iPhone volumes did not have a significant effect on our overall outcome for mobility.
Secondly, to move to your second question on putative iPhone update device, or whatever, I don't have any knowledge obviously of such an update device and I – I wish I could, but I obviously really can't provide you with any particular color on who might or might not end up selling that device. Obviously, having now gotten the iPhone in our lineup and we do think we're doing a good job of it, we would want to represent any hypothetical new device, but at this – that point, that's really all I can say.
The next question comes from Dan Wewer at Raymond James.
Dan Wewer – Raymond James
Thanks. Two questions, also regarding wireless. First, you noted that all three carriers contributed to growth during the quarter, but it sounds as if AT&T lagged Sprint and T-Mobile and that's a reversal from the impact from a year ago. So I wanted to see if you could give us some background on that. And then second, given the consequences of the rapid wireless growth of the balance sheet, are you considering changing the economic model, moving away from a residual model maybe to a larger net present value of the residuals upfront?
Well, I'm probably going to ask Jim to speak to both of these, Dan. As far as the model, obviously, currently largely wireless residual model, other than in the prepaid segment, where the economic model is different from that. To the extent that there are changes in the economic model for the industry or something like that, we would probably see those same changes, but currently I'm not sure we are seeing a rapid pace of change in that. But Jim, you're closer to the details probably than I am.
Yes, I would say we continue to analyze – or to discuss with all of our vendors the most profitable way for us both to do business. There is certainly nothing in place that would have us walking completely away from the residual model. As I mentioned, it's – with the impact of the balance sheet, it's very inherent in the wireless business and then certainly in the – at least in the near term, if not in the long term, I see us continuing to operate within some form of a residual model.
Certainly, we talk to the carriers all the time with how we are bringing new devices and new plans to market, but right now I wouldn't call, in the short term, for any significant changes from the model that you've seen historically.
This concludes our question-and-answer session. I would like to turn the conference back over to Molly Salky for any closing remarks.
Thank you, operator and thanks to everyone for your participation today. And if you have any follow-up questions from today's presentation, feel free to give me a call or send me an e-mail. Thanks and have a great day.
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