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RadioShack Corporation (NYSE:RSH)

Q4 2013 Results Earnings Conference Call

March 4, 2014; 10:00 a.m. ET

Executives

Joe Magnacca - Chief Executive Officer

John Feray - Chief Financial Officer

Bruce Bishop - Vice President of Corporate Financial Planning & Analysis & Investor Relations

Analysts

Bill Goldsmith - UBS

Matthew Darnall - Goldman Sachs

Trent Porter - Guggenheim Partners

Oliver Wintermantel - ISI Group

Elie Radinsky - Cantor Fitzgerald

Adam Sindler - Deutsche Bank

Ward Savage - Credit Suisse

John Sharko - Columbus Circle

Operator

Good day ladies and gentlemen and welcome to the Q4, 2013 RadioShack Corporation earnings conference call. My name is Mark and I’ll be your operator for today.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, the conference is being recorded for replay purposes.

I would now like to turn the conference over to Bruce Bishop, Vice President of Corporate Financial Planning and Analysis and Investor Relations. Please proceed sir.

Bruce Bishop

Thank you, Mark. Good morning everyone. With me on the call today are Joe Magnacca, our CEO; and John Feray, our CFO.

Please note that we filed our 10-K with the SEC earlier this morning. Our earnings release and the 10-K 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 the 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 at the time they are made.

We may also reference certain financial measures not derived in accordance with GAAP reconciliation’s to the most comparable GAAP measures are included in the earnings release. This information is a not a substitute for any GAAP measures and may not be comparable to similarly titled measures of other companies.

Finally, following our prepared remarks today we have allowed time to address any questions that you may have. Please limit yourselves to one question and one follow-up, so that we may get to everyone's questions during this call. If you have additional questions, please re-queue.

With that, let me turn the call over to Joe.

Joe Magnacca

Thank you, Bruce and welcome everyone and thank you for joining our fourth quarter conference call. Overall our fourth quarter results reflect a number of challenges to our business. Some were external factors and a few were internal.

This holiday season was characterized by lower store traffic, fewer shopping days between Thanksgiving and Christmas, bad weather, significant industry promotional activity, particularly in consumer electronics and a very soft mobility marketplace.

In addition to the environment, we had a few operational challenges that we clearly own. There was some disruption in our stores as we executed our strategy to remove the duplicate, end-of-life inventory out of all of our stores, while at the same time we were merchandising all of those stores.

Following that we experienced issues with our in-stock positions. We were light in some categories, including some of our private brand products and we executed quarterly on our inventory follow and allocation. Simply put, we exceeded our organizations capabilities by trying to do too much, too quickly.

For example, in our efforts to ease through our assortment, we went a little too deep and cut around 100 SKUs that sill had sales potential. We have moved quickly to put in place a number of initiatives to address these operational challenges. Even more important, we have three new executives in charge of the impacted areas, with over 60 years of combined experience, all of whom joined in the last 120 days.

Our new Senior Vice President, Chief Merchandising and Mobility Officer, Paul Rutenis; our new Senior Vice President of Global Sourcing and Product Innovation, Janet Fox and our new Senior Vice President of Planning Allocation and eCommerce, Mark Boerio. I will share more about what they have done to address these challenges since they joined our team, here in a minute.

As we noted in the past, the RadioShack turnaround will take time and our results will vary as we make strategy changes to improve our long-term financial performance. To put it in another way, we believe our fourth quarter numbers do not reflect the progress we are making on the critical five pillars underpinning our turnaround strategy. Let me give you an overview of where we stand with the initiatives supporting each of these pillars.

The first of these pillars is the repositioning of our brand. Since I joined the company, it has been clear that we needed to change the conversation about RadioShack in a dramatic and impactful way. I hope that all of you have seen our award winning Super Bowl commercial, which generated consumer engagement and coverage well beyond our expectations.

Our ad was voted the most liked ad in Nielsen ratings and received top ratings on the Wall Street Journal ad board and USA TODAY’s ad meter. In the days following the Super Bowl, our ad was covered in over 1,000 new stores, which often showed the ad as part of the coverage, allowing us to leverage the value of our marketing spend.

National shows like The Today Show, Good Morning America, CNN and Fox News featured coverage of our ad in their program. This was one of the largest media events in our company’s history.

My vision has been to disrupt the consumer’s view of RadioShack. Our first disruptive marketing effort was Beats ad with Robin Thicke, Serena Williams and 2 Chainz last summer, followed by our SOL Republic ad with Michael Phelps, Steve Aoki, Lil Jon and Alexis Y Fido in the fall. Our Super Bowl ad was a continuation of that effort and exactly the kind of disruptive marketing we needed to change the conversation and adverting during a Super Bowl was a highly efficient means to reach our consumers.

With this new ad we launched our ‘Do It Together’ brand position statement, which is ‘Can Be Done, When We Do It Together.’ The new brand positioning is designed to build upon the key change that came out in extensive consumer retargeting and market research effort, involving thousands of our customers.

People know the benefits that technology can bring to their lives, but they may not have the know-how to really leverage their technology. Their wants and needs, a partner to harvest their technology and make it work for them.

Many view our Big Box, our online only competition as ineffective in meeting this need. This is where RadioShack’s strength lie, in the power of our people. We have knowledgeable store associates who live and breathe technology everyday. People recognize and give us credit for this.

The power of our people shows up in our customer satisfaction surveys. We use net promoter scores, which measures the customer’s willingness to recommend RadioShack to a friend or family member.

When we launched this program in April, we started from a strong position compared to other well-known brands. Since then we have seen like 360 basis point improvement in our net promoter scores. As we reposition the brand our primary goal is to increase our relevance around the core value proposition, our people and their ability to help our customers solve problems.

The Super Bowl ad is only one ad, but it is the first implement of our thoughtful marketing plan that will build upon the ‘Do It Together’ brand positioning. While its early days and it will take some time to gain traction, we are very encouraged by the consumer response and the change under way in the conversation around our brand.

The second pillar is the revamping of our product assortment. The overall goal here is to improve the assortment in all our stores and the productivity of our inventory investment to drive sales and better satisfy customer demand.

Paul Rutenis, our new Chief Merchandising and Mobility Officer is leading our product assortment strategy, and Janet Fox, our head of Global Sourcing and Product Innovation is leading the complete overhaul of our private brand strategy and how we source these products. With these two executives on broad, I’m confident we will make meaningful progress this year and will be clearly evident in our stores by the summer.

We are also making progress on building stronger vendor relationships. We believe we offer our vendor partners a unique distribution channel, where our store associates and store experience are designed to demonstrate and educate consumers on a new product with features and more importantly how it connects other devices the customer may already own.

We are also returning to our roots in many areas. This includes the work we are doing to move up the technology curve to identify new products and trends earlier and support technology innovation. We want to use the strength of our people and distribution network to bring new technology to market. To that end we plan to partner at different levels with business incubators and accelerators that help investors and creators turn their ideas into market ready products.

The first of these partnerships will be Quirky. In April we expect to have Quirky products on our shelves, other exclusive products with them in stores by the holiday season. Building a tight line of new products may take time, but we believe it will become a powerful competitive advantage.

The terms of managing the products we sell, we have reorganized our business into two platforms, mobility and retail. This is a simplification of the three platforms we historically reported, as it was a fair amount of overlap between signature and consumer electronics.

Within the mobility platform we had mobile phone, tables, and all the associated accessories for these devices. Within mobile phones, we are focused on getting the right solution for each customer and educating them on all of today’s options. This could be a three year post paid contract with AT&T, Sprint or Verizon or one of our many prepaid operators, including our RadioShack branded No Contract Phones.

We are working aggressively and quickly to bring to our stores all of the new choices in service offerings from the carriers, like AT&T Next, Sprint Family and Verizon’s Edge programs.

The prepaid choices are also improving as new generation iconic phones are becoming available at launch on a prepaid basis, which were historically only available on a postpaid basis at launch. From an accessory standpoint, for both wireless and tablets we are brining in new products with the focus on fashion and function along with private brand innovation. We also expanding our selection with leading brands with OtterBox and Mophie with new colors and designs.

On the retail side of our business we have organized the business into three areas, Entertainment, Home Office Communications, and Power and Hobby. In our entertainment segment we are working to improve the depth of our top performing categorizes such as Headphones, Bluetooth Speakers and Sound Bars. We have a heritage in sound and we’ll continue to build upon on that.

We also have new private brand innovations for our audio brand planned for this year. We plan to bring a new brand by Jaybird to complement our assortment of Beats, Skullcandy and SOL Republic products. Digital fitness is still a relatively small category, but one that is certainly expanding along with the growth in all forms of wearable technology products.

We have seen good growth in Fitbit and BodyMedia’s FIT LINK and are looking to expand further in this category. We’re also brining in new brands like GoPro, which is now in nearly 100 stores and we’re looking to do more.

In Home Office Communications we are also looking to capitalizing on the building ways of consumers cutting the cable, by insuring that we have the best selection of streaming media players including Roku and Apple TV products. We are also building out an assortment of Smart Home products, a growing category of technology.

The Power and Hobby segment is one of the Hallmarks of our heritage. We want to stay connected with the ‘Do It Yourself’ consumer. We are upgrading and expanding our assortment along with an expansion of our line of co-branded products with Maker Media. We are also bringing in a line of 3D printers to over 100 stores and each store will have a demonstration unit that will be activity printing.

In December we brought them into a few stores in New York City and have been pleased with the consumer interest in this product. We are also working to revamp our toy assortment, primarily remote control cars, trucks and helicopters, provide a higher level of quality across a wide range of prices and we are expanding to include remote control drones, our growing category that fits well within our brand.

The third pillar is reinvigorating our store experience. Our Super Bowl ad promised a new and improved RadioShack and one of the keys to any successful re-branding effort is ensuring that there is consistency between the brand messaging and the in-store execution. Here we believe we are on the right track.

We are extremely pleased with the traffic and revenue performance of our new concept stores. We believe our concept stores are a significant advancement in technology retailing and exemplify the experience we believe customers are looking for when they shop for technology. They are a component of the disruptive strategy I spoke of earlier.

When customers walk in these stores, they have a fully interactive experience that is open, well lit, highly designed environment with clean lines and modern materials that really highlight the products that we sell. We are really dialing up the experience in our stores and differentiating ourselves from other Big Box self elect retailers and certainly compared to our line only competition.

Our concept stores have an interactive speaker wall with up to 12 different Bluetooth speaks that can be controlled using an iPad or you can listen to music from your own device.

We have a location where you can experience a wide assortment of headphones using your own device. You merchandised our tables on a table design to engage the customer and allow them to interact with the devices, so they can experience the differences between different brands, sizes and models.

Our mobile phones are all live devices and merchandised by major brands, for example Apple and Samsung. This is how we see our customers shopping for phones in today’s world versus historically shopping by carrier first.

We have a Do It Yourself workspace, where customers can collaborate with our associates and each other on projects and find all the parts they need. These stores demonstrate our ability to drive consumers into our stores, as well as the strength of our brand. I hope you made it one of our concept stores where we’re taking technology to a new level in retailing.

Our strategy has been to test and validate the elements that will improve store experience before we roll them out to more locations. We have developed many learning’s from the success in our concept stores, along with our living labs in both Camp Bowie here in Fort Worth and Manhattan Mall in New York City.

For example, something we tested didn’t drive sales like TV screens in the Do It Yourself area, but others have worked well, like our speaker wall and headphone table. As a result of these learning’s our strategy for the coming year will be to continue rolling out the key elements of interactivity that have the biggest impact on customer experience and drive sales.

We have developed an affordable program to remodel our existing locations, which we expect will driver sales and excitement in these stores. But you will see a larger number of remodels this year than last year, which will allow us to get the most efficient use of capital we invest in the business. We are planning to remodel approximately 100 locations along with a small number of new locations and 20 to 30 relocations.

That brings me to our fourth pillar of improving operational efficiency by focusing on execution and cost management. One element of this pillar has been a critical review of our store footprint here in the U.S. We have undertaken a comprehensive review of our portfolio from many angles; location, area demographics, lease life, historical performance and future potential, with an eye towards consolidating our store base into fewer locations, while maintaining a strong presence in each market.

The results of that review is our decision announced today to close up to 1,100 stores. This action will shrink our company-owned stores footprint by up to one quarter. These stores have been our lower performing stores and we are expected to generate losses in the coming year.

Including our dealer franchise network on 900 locations and growing number of collage bookstore locations, we will still have over 4,000 retail locations in the U.S. following the closures. We believe our business will be optimized and competitive at this level here in the United States. We continue to have a strong international presence in over 30 countries, including our company-owned business in Mexico and stores operated by our international franchise partners.

Beyond our store closure program, we have a number of other initiatives to reduce cost that are not visible to our customers. We will be reducing our corporate SG&A and controlling our expenses. Some of this will be a benefit from prior actions we have taken to reduce our workforce. We are also lowering our cost through more efficient and reduced spending on various areas of our business.

For example, we have consolidated our marketing activities with one agency and have brought in house some portion of this work at a lower cost. We’ve replaced our customer care phone service with a significantly less expensive process and partner and we are optimizing our in-store labor hours and in some cases store operating hours.

We are also continuing to see the benefit from supply chain improvements like the one I mentioned on our last call, where we implemented a process change which allows us to release shipments, as soon as the store’s replenishment needs full a box versus holding for once a week shipment. These initiatives are not always easy, but they are an important part of lower costs.

With the new executives onboard that I mentioned earlier, I believe we have made significant improvement our business processes. We have reengineered our open-to-buy process, and have much better coordination between the merchant and the planning and allocation teams to make sure we are buying the right products in the right amounts and getting them to the right stores.

For example, we have improved the depth of our top selling skews in our top doors. We’ve also improved the process we used to build the promotions included in our weekly circular, to make sure we have the right quantities in stock, in stores and in time for the event.

We are actively evaluating and refocusing our supplier base with private branded products that improves our product demand forecasting to help stabile the flow of investor and strengthen our supply relationships with a goal of driving better pricing. To that end our team has revised and tightened our key performance indicators to focus on quality, on-time delivery, improved build rate, margin and innovation.

The last pillar involves our efforts around financial flexibility. As you know we completed a new financing totaling $835 million in the early December. And this included a $585 million senior secured ABL credit facility GE Capital, Corporate Finance as well as a $250 million secured term loan led by Salus Capital Partners. We appreciate the support of these new financial partners who are providing a flexibility we need for our turnaround program.

While we have used some of the cash from the new financing in the fourth quarter. We have not drawn on a new revolver. We recognize the need to spend our new capital wisely and are doing so. While we do not provide financial guidance, we have identified several initiatives that on a combined basis are expected to lower our use of cash in this fiscal year. These included our store closure program, as well as a number of other initiatives to reduce costs that are not visible to our customers.

Now I’d like to turn the call over to John Feray. As you know, John joined us several weeks ago from Dollar General, where he made a strong contribution to that company’s performance and successful return to the pubic market. He’s still getting familiar with all things at RadioShack, but he will take you through the fourth quarter financials. John.

John Feray

Thanks Joe. Before I began, let me first say how excited I am to be a part of the team at RadioShack. Joe has surrounded himself with a solid group of seasoned retail executives and I’m very happy to be in the trenches, tackling this operational turnaround with this team.

As Joe mentioned in this remarks, our fourth quarter sales was disappointing. During the quarter our total net sales and operating revenues were $935 million down $236 million to last year. This reduction was largely driven by the performance in our U.S. company operated stores, which drove $214 million of the decline. Our comparable store sales were down 19%.

Our mobility business revenues were down by $139 million. The postpaid business performed below expectations, as a result of overall lower consumer demand for postpaid phones and an extremely promotional environment on certain phones. The prepaid business was down slightly and wireless accessories were down consistent with the overall mobility business. Comparable store sales in the mobility platform were down 23%.

Our retail platform sales decreased $75 million in the fourth quarter of 2013. This sales decrease was primarily driven by categories that we have been strategically de-emphasizing such as laptop computers and GPS devices. Also weak demand in other categorizes like Internet telephone devices, as well as inventory flow and allocation issues in several categories as Joe mentioned earlier.

These sales decreases were partially offset by increased sales of portable speakers and sales of Apple Lightning accessories. Comparable store sales in this platform were down 15% for the quarter.

Our total gross profit margin was 29.8% for the fourth quarter. Excluding one-time items, we generated a gross margin rate of 30.8%, which compares to 35.8% last year. Our lower gross margin rate was driven principally by three factors: significant discounting across the business, given the promotional environment and our price matched program, margin compression in our mobility business and inventory flow issues for some of our higher margin, private brand products like remote control toys, batteries and cables.

We reported SG&A of $389 million or 41.6% of net sales, compared to $384 million or 32.7% in the fourth quarter of 2012. Compensation expense was lower due to lower sales commissions and lower corporate headcount, which was more than offset by increases in professional fees. Our SG&A rate was higher, primary due to our overall decline in sales.

Our operating loss for the quarter was $166 million, compared to income of $16 million last year. Excluding certain one time and non-cash items, our operating loss was $115 million. These one time and non-cash items include the reserves for our store closure program that I’ll talk more about in a moment and our good will impairment of our business in Mexico.

Our business sin Mexico did not perform up to expectations in 2013, including a comparable store sales decline of 10% during the fourth quarter. As a result of lower than anticipated performance in the fourth quarter, we prepared a forecast for the upcoming year, as well as a multi-year projection. Based on that, we determined that the implied fair value of the good will of the business in Mexico was less than the carrying value. As a result, an impairment charge of $24 million was included in our fourth quarter results.

We have recently made some leadership changes in this business and we have developed a strategy to turn this business around. Overall our net loss for the quarter was $191 million compared to a net loss of $63 million last year. Excluding one-time non-cash items, our net loss would have been $130 million.

As of December 31, 2013 we had $180 million in cash and cash equivalents. Additionally we had availability of $375 million under our new credit facility. This resulted in a total liquidity position of $554 million at December 31, 2013.

Our liquidity position was impacted by the decreases in sales during the fourth quarter. We have analyzed our cash requirements, including our inventory position, other working capital changes, capital expenditures and borrowing availability under our credit facility. We expect our liquidity will be sufficient to meet our obligations, to meet our planned operations through 2014.

While we do not provide detailed guidance, I would like to provide a little more color on the impact to our business from the proposed store closure program, where we expect to close up to 1,100 stores. In the fourth quarter we recognized two impacts in our P&L. First is an inventory reserve of $10 million to reduce the carrying value of the inventory in the stores we intend to close, to the value we expect to realize through the liquidation process.

Second, is a fixed asset reserve of $11 million to reduce the carrying value of the leasehold improvements and fixtures in these stores. As we mentioned in our earnings release, the proposed store closure program is subject to the consent of our lenders under the 2018 credit agreement and the 2018 term loan.

In the coming weeks we’ll be working with our landlords to find and efficient and cost effective means to exit these unprofitable locations and as such we’d engage A&G Realty to assist us in this process. We expect this may involve a negotiated lease termination payment in some cases, which would be a use of cash. That will be more than offset by the cash generated from the liquidation of the inventory in those stores at the time of closing. So overall, we expect this will provide a benefit to our overall liquidity.

As we look forward to the coming year, we will be extremely focused on reducing our operating costs that do not impact the customer experience. We have a number of cost reduction initiatives in place, many of which Joe mentioned earlier. We will continue to review all of our costs and look for opportunities to improve our overall operations to provide for growth in the future. As we go through fiscal 2015, we will share more with you on these cost reduction initiatives.

With that, I’d like to turn the call back over to Joe.

Joe Magnacca

Thank you, John. Before we turn to the Q&A portion of our call, I’d like to make a few comments about my first 12 months with the company.

Overall I think we made a lot of progress this year. I felt after joining the company that we were weak on many of the fundamentals and a few were just simply broken. As a result the starting point was lower than I expected. This reinforced in me to rebuild the leadership team and other key roles deeper in the organization, which has taken longer than first anticipated.

Now we have a leadership team in place. Even though some individuals have been here less than 120 days, they have made significant progress in rebuilding the fundamentals, reestablishing and coordination between functions and rebuilding some of the basic retailing processes.

We’re also building the organizational muscle across our business that will allow us to execute the big actions we’re taking this year, like our plan to close up to 1,100 stores, along with the more typical actions of a retailer.

Our turnaround plan is on track. We have a detailed strategy and initiatives defined, and we’re executing against them. Without minimizing the challenges ahead of us, I’m confident we can continue to execute our turnaround plan and position RadioShack for the future.

Before we move on to Q&A, I’d like to personally thank all of our employees who invested their time and passion for RadioShack this year, to execute the changes we’re making to turnaround this business. As our brand positioning states so effectively, ‘It Can Be Done When We Do It Together.’

Now I’d like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Lasser of UBS. Please proceed.

Bill Goldsmith - UBS

Bill Goldsmith filling in for Michael Lasser; thanks for taking my call. You mentioned earlier in the call that you’re looking to partner with your vendors. How has that been received and what have you heard from them?

Joe Magnacca

I think a lot of the conversation around the vendor community has been hugely of support as you saw and as we indicated in the script. We have been partnering with people like Beats and SOL Republic and Google and Apple in ways that we haven’t in the past.

One of the common things that we do hear from them is productivity on a per store basis and that has been one of the inputs that we’ve used in terms of defining our future of the store footprint. So we want to make sure that we don’t strand inventory in under performing stores and make sure that as they allocate inventory, particularly on product that is in high demand and is in some sort of allocated model that we’re making it as productive as possible.

So we’re feeling really good about the top-to-top strategic relationships with all the carriers. Some of our key, I guess our top 27 vendors is how I defined it and have moved into a much more top to top strategic management process for each of those vendors.

Bill Goldsmith - UBS

Great, thank you.

Operator

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

Matthew Darnall - Goldman Sachs

Hello, this is Matt Darnall on for Matt Fassler. First question, could you provide some additional detail on the impact of the store closings? How this exit will impact the major P&L items, the revenue base and the overall fixed cost structure?

John Feray

Matt, this is John. We’re not going to go into a whole lot of detail on the overall components, but I will give you just a little bit more color in terms of the overall process.

We do plan to work as quickly and as efficiently as possible in the store consolidation plans. As I mentioned earlier, in some respects we’ll have negotiated lease terminations. In some cases the overall cash related to that will be more than offset by the liquidation of the inventory.

So when you think about overall, the impacts in our business, you would have the potential lease termination and the potential other reserves related to inventory that would – we don’t recover complete cost. That’s right now, those are the two items, but as from an overall liquidity standpoint, we’ll generate a lot more cash as we close those stores through the liquidation process and as part of the overall liquidation process, we’ll make a decision between one liquidator or multiple liquidators to get us the best opportunity for execution, to generate the cash necessary to offset any potential lease termination costs related to the overall program.

Matthew Darnall - Goldman Sachs

Okay. So your best estimate is that the inventory reductions substantially offset the cash costs from exit.

John Feray

That’s our expectation for fiscal 2015.

Matthew Darnall - Goldman Sachs

Okay, and one quick follow-up on the cuts to G&A. Any more details you could provide within those categories or an overall quantification would be helpful. Thank you.

John Feray

I mean obviously the optimization of the store-operating model is something that is very important for us as we moderate the overall hours in our stores to effectively serve our customers.

Joe mentioned a little bit about the consolidation of the advertising with one to make that in-house and lower overall costs. I would also say that there is multiple initiatives from a cost perspective as well, to lower our overall costs, be it with different shrink improvement strategies throughout the company, as well as working with our vendor suppliers to make sure that things are more efficient from an allocation of inventory side of things.

A lot of the improvements that the team has made as it relates to inventory and allocation and planning, as well as from a private brand, those are some of the cost reductions and improvements that we’ll see, that will clearly give us our pathway to profitability as we go forward in the future.

Matthew Darnall - Goldman Sachs

Okay, thank you.

Operator

Your next question comes from the line of Trent Porter from Guggenheim Partners. Please proceed.

Trent Porter - Guggenheim Partners

Hi guys. Just a quick one. In the past you all have given some granular detail about your liquidity needs. I think it was $125 million in cash in the stores and $200 million and $250 million peak to trough working capital, and I was wondering if its possible to update that performance for the 1,100-store closure and before I – I just wanted to clarify something you said earlier. I would assume that working capital or inventory liquidation as a result of the store closure would be a net source of cash during the year versus just mutual netting out the cash cost of liquidation. I just want to clarify that.

John Feray

This is John, yes, it will be an improvement for overall liquidity position from where we’re at on the last part of the question.

Trent Porter - Guggenheim Partners

Okay, and then on the first part, are you able to – have you gone through the exercise yet of figuring out what your peak to trough working capital need will be going forward and can I just reduce the $125 million that you needed before by a quarter?

John Feray

I think that its consistent in terms of our overall seasonal impact of our inventory could be between $100 million to $150 million in terms of the working capital. Very consistent to where we’ve been before. That might lower as it relates to the overall store closures, but right now we’re still working through the specific stores that we’ve been looking at from a store closure process and as we have more information, we’ll provide more details in upcoming calls.

Trent Porter - Guggenheim Partners

Okay, and then two more questions before I get – the first one is, the five pillars that you’re talking about in the fourth quarter. I mean obviously the re-branding I think sort of kicked off with the Super Bowl. Where exactly were you with respect to the five pillars through the fourth quarter.

As I recall, there was still some inventory liquidation going on in October, but is it possible to give us an idea of how far along in the process you were through the fourth quarter in terms of these five pillars. I think you’re still kind of at the very beginning, but...

John Feray

I think you’re absolutely right. We had lined up our strategy in preparation for what we’re referring to as fiscal 2015 to kind of hit the road running and not be at a standing start. The work that we did on all five pillars, including operational efficiency, many of those processes were put in place.

In the third and fourth quarter we were – in the third quarter and the first month of the fourth quarter still exiting our EOL inventory as part of that change, which took about a month longer than I certainly anticipated – all the (inaudible) talks to some of the fundamental basics that we stress tested our business on during that period from a financial flexibility perspective, obviously in the fourth quarter is when we secured our financing from repositioning the brand.

One of the things that you probably saw happen quarter-to-quarter last year was the move of our advertising mix and media to a much more efficient and effective means from a television, radio and circular perspective where we started putting advertising activity in front of our consumers who went away from tonnage and they went into quality of messaging and use of those messages at the right time. So the balance of circulars, television, media and obviously an amped up social campaign became very key and during the third and fourth quarter that rally gained some strength.

From a product assortment point of view, outside of exiting EOL what you started to see was some seasonal skews that we were able to effect, but certainly not any primary skews in our core assortment and that work will start to happen as I mentioned in my earlier comments, both from a national brand and private brand perspective as early as April in our stores, but a lot of the private brand work will happen through the summer and into the third and fourth quarter, as a lot of that product was just recently developed in the last year.

So it is a journey and the way we view it is that all five of those pillars were in play, but not all as visible to everyone on the outside as they are on the inside.

Trent Porter - Guggenheim Partners

Okay, and then my last question was the, the stores that you’re closing, are these stores part of clusters. In other words, are they for the most part close enough to other stores such that you think that you might keep a lot of that revenue and customers will just go to the next closest store or you think that you’re going to be selling off of a big chunk of revenue in the process?

John Feray

Well, its interesting. You know we started our formal real estate reviews when I first got here in February and we started looking on a market-by-market basis and our goal is to look at a particular market and make sure that we could satisfy the customer. To your point, to try to move some of that traffic to fewer locations, I’ll use my personal example here in Fort Worth. Within five miles of my home I have eight RadioShack locations. So in that example we are over stored.

When we look across markets outside of Fort Worth and of course in major markets, which is where we started, we realize that there were two things that we saw. There was that over saturation of penetration in that particular market and there were some opportunities in other markets where the real estate that we currently had was not appropriate for our go forward position. So you don’t see a combination of those two weighing in heavily of the 1,100 stores that we will close.

Trent Porter - Guggenheim Partners

Understood. Okay, thank you so much. I’ll get back in queue.

John Feray

Thank you.

Operator

Your next question comes from the line of Oliver Wintermantel from ISI Group. Please proceed.

Oliver Wintermantel - ISI Group

Hi, good morning guys. You mentioned a store closure program in subject to lender consent. First though, when do you expect that by? And then next, how many of these leases within the 1,100 stores do you expect you have to break?

Joe Magnacca

We’re still in the process of determining the overall number, the leases that we would break. Its just the normal process that we would go through to actually negotiate with our landlords, to actually get to the final number. That’s why we try to be as clear as we could and say that its up to 1,100 stores. We maybe getting to a situation where we receive ample rent reductions from our landlords to keep a store in place, to make the store even more profitable than taking it from a loss to making it even more profitable.

The second part of your question again Oliver?

Oliver Wintermantel - ISI Group

The lender consent, by when do you expect that by?

Joe Magnacca

Year end we’ll be negotiating with our lenders over the course of the next month to receive the overall consent and then the plan would be that sometime in Q1 or beginning in Q2, depending on our business partners in terms of whoever we decide to go with, one liquidator or multiple liquidators and their availability to begin the store consolidation and closure process.

Oliver Wintermantel - ISI Group

Okay great. And then lastly, have any of the vendor terms changed over the last year?

Joe Magnacca

No. I mean we’ve had a little bit of movement in terms of the overall, the vendor terms, but let me kind of characterize that in terms of how I look at overall, the terms. At the end of the Q4 we had about $121 million of either LC’s or collateralized LC’s as it relates to our overall communications with our vendors.

Currently – now we don’t necessarily provide this information or details on an ongoing basis, but just to give you a little perspective, currently that number is, I don’t know, right at about $67 million. That’s a reduction of close to $53 million when you look at it from the end of Q4 to current and of that $53 million reduction net-net, $30 million of it’s a reduction related to some treasury cash management LC’s related to our control disbursement account and another $23 million reduction of trade and vendor LC’s.

With that being said, the current LC’s and restricted cash of about $67 million, just to give you perspective, $25 million is related to our current treasury banking relationship and another $32 million relates to the overall workers comp insurance letters of credit, which is standard, leaving about $10 million related to trade and vendor LC’s. So with regard to the overall position, hopefully that gives you just a little bit more color in terms of where we stand today.

Oliver Wintermantel - ISI Group

Yes. No, that’s very helpful. And lastly is there any sense you can comment on January and February, the trends, have they improved since the fourth quarter?

Joe Magnacca

Yes, in terms of just in general we’re not going to go into that level of detail, but as we look to 2015, our fiscal 2015, we do expect our sales trends will continue as we progress through the year, given the new products, the new innovations in our stores, the private brand products, as well as the improvement to the in-stocks and inventory allocation that the merchandizing and planning and allocation and private brand themes have put in place in the last 120 days. We’re very excited about the things that they have done and are doing to put us in a position to calculate a profitability.

Oliver Wintermantel - ISI Group

Okay, thank you very much.

Operator

Your next question comes from the line of Elie Radinsky from Cantor Fitzgerald. Please proceed.

Elie Radinsky - Cantor Fitzgerald

Yes hi, since your closing roughly a quarter of your owned stores, is it fair to assume that inventory which are ascribed to be closed stores is roughly 20% to a quarter of the total inventory on your balance sheet?

John Feray

That’s it, that’s a good rough estimate, yes.

Elie Radinsky - Cantor Fitzgerald

Okay. Also it appears that you did a really good job in reducing your accounts receivable on a year-over-year basis more than by half. Can you explain how you did that and is it at the current level, assuming that we’re going to reduce the store base that should be coming down even further.

Joe Magnacca

That’s the overall receivable and the overall mobility business. The wireless business is a little bit down as I mentioned earlier, so that’s going to translate into the overall receivable.

Elie Radinsky - Cantor Fitzgerald

Okay. In the next quarter are you going to have the stores that you’ve earmarked for closure in discontinued operations?

Joe Magnacca

Currently that’s not what we’re planning on doing that. In terms of the discontinued operations, that will be in the normal operations of the business.

Elie Radinsky - Cantor Fitzgerald

Okay, thank you very much.

Operator

Your next question comes from the line of Adam Sindler from Deutsche Bank. Please proceed.

Adam Sindler - Deutsche Bank

Yes, good morning. Two quick questions. First I was wondering if you guys have considered a per package bankrupcy in any way to try and get out of these leases maybe a little bit quicker. And then just as a follow up, I wanted to see if you could give any sort of color on how the changing of the financial calendar will impact the quarter as we look at our forward model. Thank you.

Joe Magnacca

I’ll answer the last question first. Bruce will provide that information as we are changing our overall retail calendar to a typical retail calendar with the year ending January. It will change the reporting sequence as we go through the year and we’ll provide that information at a later time.

In terms of the pre packaged bankruptcy comment, no, we have not done that. We believe and look into everything that we have, we feel like we have enough liquidity for the remainder of the year. When you look at the overall inventory position, working capital changes, the capital expenditures, borrowing availability into our new credit facility, we believe our anticipated source of liquidity will be sufficient to meet our obligations in 2014. Okay?

Adam Sindler - Deutsche Bank

Yes, thank you. I appreciate it.

Operator

Your next question comes from the line of Ward Savage from Credit Suisse. Please proceed.

Ward Savage - Credit Suisse

So my first question was already answered, but I just wanted to get some clarification up on the consent you guys needed from the lenders. Can you be more specific about that?

Joe Magnacca

Yes, our current credit agreement and you can read it at your leisure, but to just give you a highlight, our current agreement allows us to close up to 200 stores per year, up to 600 over the life of the overall credit agreement and we are working with our lenders to obtain the overall consent and will be working through that over the next month to provide that, to get that consent.

Ward Savage - Credit Suisse

Great, I appreciate that. And then just real quickly, any comments on cash balance as of today or ABL availability?

John Feray

Yes, the ABL availability, I mean in terms of the overall availability is not totally and different from where we ended the year. There’s a couple of puts and takes, but overall we’re in good position there.

Ward Savage - Credit Suisse

Okay, and then with cash balance?

John Feray

Again, we’re not going to give a lot of the granular detail in terms of the specifics, but we’re in great position. We have ample liquidity for operations for 2014.

Ward Savage - Credit Suisse

Okay, thank you.

Bruce Bishop

And Mark, we have time for one more question.

Operator

Your last question comes from the line of John Sharko from Columbus Circle. Please proceed.

John Sharko - Columbus Circle

Hi guys, thanks for taking the call. Just a couple of questions. Most of them have been answered. One question is with regards to any outlook for visibility to free cash flow positive, and also your comments about funding seem to be specifically limited to 2014, but what about 2015? And then lastly, have you received any concern from your auditors about your status as a growing concern?

Joe Magnacca

Well, I’m going to start John. Maybe I’ll jump in and talk specifically about kind of our pathway to profitability and I think that we’re feeling real good. We kind of look at it in four different segments. Obviously the new product development that we talked about, which includes our private brand and new incubated products that we’re bringing in as well as new branded products and we see that obviously impacting both sales and margin in a very positive way.

The private brand innovation piece is we believe going to be key to our success moving forward and that’s why we spend so much time on the development plan. With a strong team in Asia and a strong team here on the ground in Forth Worth and some new partners that we’re working with, we feel very excited about what we can do in a product line-up.

Clearly from an inventory point of view we talked about that being an Achilles' heel last year. Obviously with Mark Boerio and Paul Rutenis and Janet Fox joining the team we’re more in line than ever. So we see that our ability to allocate inventory against top selling stores, top selling skews, etcetera, across our network will be a huge enhancement to both sales and margins moving forward and we’re going to just continue to be very, very focused on reducing cost that customers don’t see and drive down SG&A as much as we can in fiscal ‘15 and beyond.

John Feray

Listen, in terms of – let me answer your question in another way in terms of why I came to RadioShack. I truly believe that we have the best people in the stores, in the business. I think that’s a key ingredient to our overall success and we have one of the most powerful and iconic brands out there in the arena in terms of retail and clearly put, I think there is a great opportunity for this business to succeed.

This is not atypical to what my experience has been in the past six years. Everything that I have seen this management team do and is doing is on a pathway to profitability and it involves the overall turnaround.

We use that term throughout our prepared comments, but when you look at the overall turnaround that’s taken place, this company has a retail CEO. We’ve taken accountability for the inventory, we’re changing the perception of the brand. We’ve got a strong management team in place and we have a plan for our store for the future that is really making in roads and we’ve taken a really comprehensive look at the store profitability.

When you look at all those things and realize that there is a certain amount of things that are clearly in our ability to control in terms of the processes and improve the store execution, things that retailers can’t control, I feel like there’s a great deal of success and opportunity as it relates to RadioShack.

With that being said, to your specific question, as we execute the strategic turnaround plan, we will be tightly managing our cash and monitoring our liquidity position. We’ve implemented a number of initiatives as we’ve already talked as it relates to cost and sales management improvements to improve our liquidity, including activity that we talked about related to capital expenditures, reducing discretionary spending and really working to improve our overall processes. We recognize that we need to invest properly and we believe that we have the liquidity to fund our operations throughout 2014.

John Sharko - Columbus Circle

Okay. If I could just sneak in a couple more. Maybe I could take it up the income statement a little bit and not free cash flow positive, but do you have visibility towards EBITDA positive at any point? And I guess more granularity, I don't know if you’ll be able to answer it, but your new stores, can you give us any color on whether or not those stores are profitable?

John Feray

In terms of the overall new concept stores, is that your question?

John Sharko - Columbus Circle

Yes, yes.

John Feray

We’re very excited about the overall sales performance of the concept stores and as Joe mentioned, we are overall in terms of trying to drive, driving to the profitability and overall returns, we have some key learning’s that we’re going to be rolling out in terms of some of our new stores and remodels in 2014 that we’re very excited about.

Joe, you want to talk a little bit more about that?

Joe Magnacca

I think we are really excited about the top line sales performance. As we look at the mix, yes, new stores were done without any real new content. So we are looking at our overall mix and understanding the impact of mobility penetration. Within mobility prepaid penetration that creates a very different dynamic on gross margin rate.

We are trying to get comfortable with our staffing level. As you can appreciate, one of our objectives was to make sure that we are dealing with the customer. So we from a label point of view invested heavily from a label perspective in those stores and we are trying to find the right sized label model to get us to a much better bottom line position than we current feel today.

So that’s work in process, that’s how I’d describe it. I’d say we built these stores to demonstrate top line growth and we’ll continue to work a model on a margin and an EBITDA perspective against each of those stores and that’s the work that’s happening in the next roll out that we referenced earlier.

Bruce Bishop

Thank you. And Mark, if you will conclude our call.

Operator

Ladies and gentlemen, thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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