RadioShack's (RSH) CEO Joe Magnacca on Q1 2014 Results - Earnings Call Transcript

| About: RadioShack Corporation (RSH)

RadioShack Corporation (NYSE:RSH)

Q1 2014 Earnings Conference Call

June 10, 2014 10:00 AM ET

Executives

Bruce Bishop - VP of Corporate FP&A & IR

Joe Magnacca - CEO

John Feray - EVP and CFO

Analysts

Greg Melich - ISI Group

Matthew Fassler - Goldman Sachs

Michael Lasser - UBS

Trent Porter - Guggenheim Securities

Dan Wewer - Raymond James

Carla Casella - JPMorgan

Elie Radinsky - Cantor Fitzgerald

Operator

Good day ladies and gentlemen and welcome to the Quarter 1, 2014 RadioShack Corporation’s Earnings Conference Call. My name is Sally 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 towards to the end of this conference. (Operator Instructions) As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to Bruce Bishop. Please proceed.

Bruce Bishop

Thank you, Sally. Good morning everyone and welcome to the RadioShack first quarter fiscal 2015 investor conference call and webcast. With me on the call today is Joe Magnacca, our CEO; and John Feray, our CFO.

Please note that we filed our 10-Q with the SEC earlier this morning. Our earnings release and the 10-Q filing are available on our Web site, 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 as of the time they are made. We may also reference certain financial measures not derived in accordance with GAAP reconciliations to the most comparable GAAP measures are included in our 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. Please re-queue. if you have additional questions.

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

Joe Magnacca

Good morning everyone and thanks for joining us today. Overall our first quarter performance was challenged by an industry-wide decline in consumer electronics environment and a soft mobility market, which drove negative traffic trends throughout the quarter, in particular our mobility business was weak due to lack luster consumer interest in the handsets available in the market today, aggressive price competition on those products and intense wireless carrier marketing activities.

Carriers have been running promotions designed to incentivize customers to switch networks along with new carrier financing options that were initially only available in their stores. Soft sales and mobility along with negative traffic trends were the key drivers of our comparable store sales decline of minus 13.8 in financial performance this quarter. While we faced headwinds in our sector of retail, we have a clear vision for RadioShack’s future and a detailed strategy to turn the business around. Our entire team is focused on executing our vision, adapting to the environment and managing our balance sheet while driving sustainable change.

Let me share with you the progress we’re making on our turnaround strategy as the foundation for our future. I’d like to first start with a few comments on the great team here at RadioShack. I have shared with you several appointment to the senior leadership team we have assembled to join the Company early last year. That work continues as we refresh and invest in talent across the business with a mix of external hires and internal promotions. Most recently we expanded Mike DeFazio’s role to include store operations. Mike came up to the operations function with companies like Walgreens and Duane Reade before joining RadioShack last year as our Head of Store Concepts.

We’re pleased to have someone like Mike on the team with over 36 years of retail experience and the capability to take on the operations function while continuing to drive our new store design. In addition to the leadership team we’re also making changes and adding talents in the areas that are key to our turnaround plan. Like our product development team. All of these people bring a depth of experience to their roles and we have high expectations for the contributions they will make in their respective areas.

Next let me turn to the work underway on revamping our product assortment where we’re bringing in new categories, new brands, new products and new private brand innovation. The goal here is to drive differentiation and newness. We’re in the process of refreshing 30% to 40% of our assortment this year with new products. To make room for those new products we’re removing unproductive products and inventory.

I believe that progress in this area of our business will drive the most meaningful improvement in our performance this year. It will affect all of our stores and is intended to drive sales across our network. Our retail platform is where we have the greatest ability to impact and refresh our assortments. Last week after much of ground work we announced RadioShack Labs, a strategic collaboration with PCH, a well known and respective leader in product innovation.

PCH has a proven track record as a leading incubator and accelerator offering investors end-to-end design capabilities coupled with extensive and efficient relationships with manufacturing and best-in-class sourcing and logistics. RadioShack Labs allows startups to leverage our significant retail distribution, knowledgeable store associates and marketing capability with PCH’s highly regarded experience in product innovation and direct sourcing.

In July new products from this relationship should start arriving in our stores with introduction like LittleBits, a colored coated modular system for building circuits and electronic projects and widely the intuitive activity sharing experience that supports an independent lifestyle for older outlets. We expect to expand this relationship to more categories as we move through the balance of the year.

Most importantly this joint effort of PCH allows us to work directly with investors and makers to bring products to market by offering favorable start-up charges. A traditional retail model typically requires heavy inventory and infrastructure that prohibits many great products from being created. Through this relationship we are developing a fast-tech capability that is designed to allow us to have a continuous flow of new mechanize shipped directly to our stores. This creates differentiation for our product mix and further addresses newness in our assortment. This is the first phase of our relationship of PCH and we will share more with you in the future as things develop.

On our last call we announced a new relationship with Quirky, a product development company that crowdsources great ideas through an online collaborative process that brings them to market. This is another avenue where we can generate newness and differentiation in our product assortment and celebrate the role of the inventor in RadioShack’s transformation. In April, we added Quirky’s best relevant products to our assortment, while recently RadioShack co-hosted an invention challenge with Quirky, where we held the concepts for the best new smart toy idea. Last week in a live webcast, a joint team of Quirky and RadioShack executives selected four toy ideas from over 500 submissions from around the country. The four ideas included a smartphone, control of a remote submarine, an interactive laser game, a DIY fit to create LED lit jewelry and smartphone controlled vehicles that break apart when crashed and can be put back together. These four ideas will move on to the next phase of development. We are excited to collaborate with these inventors using Quirky, the Quirky crowdsourcing platform for technology, innovation and new product ideas.

Beyond these two product incubators we are continuing our support and connecting with the DIY consumer. Last month, I attended and spoke at the Maker Media Fair in California. I also met with Dale Dougherty, the founder of Maker Media, and one of the most respected leaders in the community. He and I co-hosted the session on the role of RadioShack in the Maker community. We invested the time to host opportunities for direct feedback. And it was refreshing to hear both positive encouragement and constructive feedback from the leaders of an important role of customer base. To further this relationship we have expanded our line of Make-it kits and partnership with Maker Media which brings newness to our DIY product assortment. Our DIY customers are creative people and we believe they may be of a potential source for new product ideas and further innovation.

On our private brand efforts, I am excited about the progress we are making on rebuilding and re-establishing the basics of this function. We have developed the integrated strategy which redefines our product development process and is designed to instill a strict discipline of product lifecycle management throughout the organization. This strategy is intended to allow us to better plan and execute more frequent assortment changes, reduced lead times and improved costing. We’ve centralized our sourcing decisions in order to improve supplier relationships and streamline production impending timelines, simply put by better aligning our product timeline and inventory demand with our suppliers they’ll be able to more efficiently manage their raw material ordering and manufacturing resources. This effort includes a new supplier metrics management process with the goal of rationalizing our supplier base with product we are manufacturing that we believe will lead to improvement and efficiency in shorter time from product concepts, to delivery to our stores.

We’re already realizing the benefits from these sourcing efforts. We’ve improved their on-time delivery by 10 percentage points and it now exceeds 90%. We have reduced cost between 5% and 8% on some of our core products. Some of the products coming from these efforts will include new portable power that will arrive in the third quarter followed by a more comprehensive gift strategy for the holiday season that includes app-based toys, a new line of drones, and toys that are geared towards both boys and girls and the young DIY customers. These products support our strategy to bring differentiation and newness to our assortment each season and importantly enhance our overall gross margins.

Beyond these efforts to develop a strategic pipeline of innovation and new products we continue to see strength in the stable of categories that have performed well for us over the past several quarters. Categories that revolve around sound continue to be strong like portable speakers, headphones and sound bars. This includes strong sales of brands like Beats and SOL Republic. Beat Solo 2 headphones are in stores now and riding new brands like JBL and Jaybird. We have exclusive headphones coming from JBL and with Jaybird we are expanding our assortment of Bluetooth headsets. Importantly, we are also seeing strong sales of our high margin private brand AUVIO earbuds and portable speakers. Through to our brand purpose of doing it together we are doing particularly well driving the sales in categories that are new to consumers and benefit from interactive experience with lot of our store associates. For example, digital fitness continues to perform with products like Fitbit flex.

In our entertainment category we continue to see solid sales of streaming media players where customers are cutting the cable and using new products we have added like Google’s Chromecast and Roku’s new streaming stick along with Apple TV and Roku’s other streaming players. We are also excited about the connected home category of products are we are bringing in new items from Belkin and NCR that allow you to connect this and intuitively manage your surroundings. Apart from these categories we have been strategically growing our assortment of Apple branded products. In addition to the many iPhones and iPads that we sell, about a year ago we added Apple branded Mac accessories which has generated strong sales growth. Altogether we have become an Apple top-five retailer and best-in-class retailer for Apple Care and Apple branded accessories. We believe this demonstrates the value of our store associates and our retail footprint where they can provide for major brands.

Our mobility business continues to struggle in what has become a very challenging marketplace. As other retailers have mentioned, the mobility marketplace has been soft for a couple of quarters. We believe a good portion of this weakness is due to lack of consumer enthusiasm for the current assortment of handset choices, both on the postpaid side and on the prepaid side of the business. We’re anticipating new products from key vendors this fall, including a new Hero product from Apple, new wearable products from Samsung and new mobility products from LG. With respect to the postpaid business each of the carriers have introduced new equipment installment plans or financing options over the past few months and they’ve begun to promote them heavily. These options are initially only available at carrier stores and not at national retailers like RadioShack. We rolled out Sprint easy-pay program, along with a family rate plan in April, Verizon’s Edge program is now available in our stores, and we’re also working closely with AT&T to implement the AT&T Next program. These carrier financing programs provide the customer with more choices on how to pay for the handset and more importantly, provide more flexibility on when they can update to the next generation handset.

In our wireless accessories business we are building a steady cadence of new products to this assortment, like our RadioShack branded World Cup phone cases that are in our stores now. We plan to accelerate the flow of new products to our stores with more current fashion and features with branded partners and our own private brand. We’re also adding more services to our in-store offering as a natural extension to our brand purpose and heritage. Fix-it-here is a new repair service for mobile devices operating in select RadioShack stores. This service includes repairing smartphones and tablets for such things as replacing screens, batteries, power buttons, cameras, speakers and more. In some of these stores we also offer a diagnostic service of identifying any hardware or software issues with your smartphone, we piloted Fix-it-here in a couple of markets over the past several months with great results. Stores with this service are outperforming the chain on sales and profit and we believe Fix-it-here drives new traffic to our stores based on customers using this service and the number of stores, the number of calls our stores are receiving. Fix-it-here is at nearly 300 stores and more than 700 locations this year.

We believe we’re the first national chain to offer in-store repair for mobile devices. Fix-it-here has the potential to drive meaningful growth in our stores as we scale, and we can drive traffic with further marketing support. Now let me share with you the progress we’re making on reinvigorating our store experience. We continue to see strong performance in our concept stores we have our 38 concept stores opened across the country with our latest opening in Baltimore. We are pleased with the continued strong, double-digit sales growth in the stores with prior year sales history. The modern and new design of these stores and the interactive experience they offer are key drivers of this success.

For example our speaker wall has driven sales of portable speakers into the triple digits some weeks. While we’re pleased with the sales we’re finding that the mix of revenue is a little different from what our initial expectations were. The revenue growth has been higher than expected in the mobility category and in particular the postpaid business, along with higher sales of branded products in categories like headphones. While our gross margin performance may be lower than we initially expected these stores were operating with limited changes to their assortment. We expect to improve gross margin performance and profitability with the assortment changes we’re making that drive newness and differentiation.

On our last call, I shared with you that we’re creating an affordable remodel program that will impact approximately 100 stores this year. These stores will get the best of what we have tested and global success in our concept stores. These interactive elements include our speaker wall, headphones, wall displays with live demo units, live devices for phones and tablets and impulse pictures near the check out. All of these features drove strong double-digit sales for these products in the concept stores. We’re also allocating space for new product categories like a connected home area, wearable technology, power headquarters, 3D printing and fashion accessories along with space for our new service offerings like Fix-it-here.

And let me wrap-up by discussing our efforts to reposition the brand where we’re changing consumer perceptions, expanding our brand to more consumers and most importantly driving traffic to our stores. This began with our highly successful super bowl commercial in early February when we launched our Do It Together brand positioning. This new branding really highlights one of the greatest assets, our store associate and the level of customer service that they provide. We continue to see improvement in our already strong Net Promoter Score, a measure of customer satisfaction which asks a customer, it recommends our store to friends and family.

Not surprisingly our highest score comes in the areas, of made me feel welcomed, helped me find the right product and made me feel like a valued consumer. This clearly demonstrates the value that our store associates are providing to our customers day in and day out. We believe our store associate team is one of the best in the business, to enhance that we’re implementing a new technology that’s intended to allow our store associate to be more efficient with their time and more effective with our customers. In April we rolled out RS Connect, a platform that our store associates can use to connect with each other. Providing easier to access to our knowledge management platform and access of training and information on new products, promotions and critical company information, in addition this platform has become a way for our operators and our leadership to hear real time feedback from the frontline, about any issues or problems so that they can get addressed and fixed quickly.

In just two months over half the store associates have been begun using the new tool and interacting with each other. On a full support of RS Connect and regularly monitored conversations, along with posing questions directly to the team, our partner Jive tells us this has been one of the successful implementations and quickest adoptions. The RadioShack brand continues to be a strong and valuable brand. Beyond our traditional marketing with circulars on television, we continue to build that value through our own channels for communicating with customers as part of our marketing mix, for instance social media continues to grow as a source for engaging customers with content as well as promotional information. In fact, we have millions of highly engaged Facebook fans, which have grown by 37% since last year.

We also have a growing following on Google Plus and Twitter. We are making efforts to grow our customer database by delivering receipts and special offers to customers through email. In addition, we have almost 70 million mailable customers we can leverage for direct marketing and partnership with our vendor community. We are engaging with our core customers, like the inventors and makers through partnerships and marketing that I mentioned earlier. And we’re also targeting new consumer groups like the growing Hispanic segment with advertising our new vision along with of all sports fans with advertisement during the World Cup. We have many powerful ways to tell our story to current and new customers. With great customer experience, powerful promotions and a strong marketing plan that all supports the turnaround efforts of the brand.

Now I would like to turn the call over to John Feray, and let him take you through our first quarter results. John?

John Feray

Thanks Joe. Let me walk you through our first quarter performance. During the quarter our total net sales and operating revenues were $737 million, down $112 million to last year. Our U.S. company-operated stores drove the majority of this shortfall with sales of $674 million down $102 million versus last year reflecting a 14% decline in comparable store sales.

Sales in our mobility platform were down by $84 million due to the low consumer interest in the current assortment of handsets, aggressive promotional environment on these products and intense wireless carrier marketing activities that Joe mentioned earlier. Wireless accessories were down consistent with the overall mobility business and we did see growth in our tablets business. Comparable store sales in the mobility platform were down 19%.

Sales in our retail platform decreased $33 million, primarily driven by categories that we have been strategically deemphasizing, such as laptop, computers and GPS devices. In addition to weak demand and other categories, like Internet telephone devices, these sales decreases were partially offset by increased sales of Apple Lightning Cables, Portable Speakers and Digital Fitness. Comparable store sales in the retail platform were down 8% for the quarter.

Our total company gross margin was 36.5% for the first quarter, this compares to 40.2% last year. Our lower gross margin rate was primarily driven by the promotional and pricing environment in the mobility business along with discounting and margin pressure in our retail business. We recorded SG&A of $336 million or 45.6% of net sales, compared to $334 million or 39.3% in the first quarter of last year. The SG&A dollar increases were related to advertising and professional fees and were offset by reductions and compensation and other cost reduction efforts. The SG&A rate was higher primarily due to our overall decline in sales.

Overall, our net loss was $98 million for the first quarter compared to a net loss of $28 million last year driven by the decline in sales and pressure on gross margins. As of May 3, 2014, we had $62 million in cash and cash equivalents. Additionally, we had availability of $362 million under our new credit facility. This resulted in a total liquidity position of $424 million at May 3, 2014.

We have historically used a portion of our credit facility for letters of credit. At the end of the quarter these letters of credit totaled $67.8 million. Subsequent to the end of the quarter we drew down on the credit facility for general corporate purposes, as of today we have outstanding borrowings of $35 million on the credit facility.

Our liquidity position has been negatively impacted by the operating losses over the past two years including losses in the first quarter. We have analyzed our cash requirements including our inventory position, other working capital changes, capital expenditures and borrowing availability under the credit -- under our credit facility. We believe our current liquidity will provide the financial flexibility to continue executing our strategic turnaround plan over the next 12 months.

Our ability to maintain a sufficient liquidity to fund our operations and execute our strategic turnaround plan is contingent on improving the current trend in our operating results. This plan anticipates that sales and gross margins will improve over the next 12 months in the mobility and retail areas of our business. Based upon the merchandize initiatives Joe discussed earlier.

In addition, we have cost saving initiatives underway that are designed to improve our operating performance, while at the same time not to impact the customer experience in the stores. First, is our store closure program, while we anticipate that a store closure program of up to 1,100 stores, we currently have been not been able to find mutually agreeable terms to obtain consent from our lenders necessary to proceed. We do continue to have a strong, productive and positive relationship with our lenders and more specifically good dialogue on this topic. Our lenders are a very important part of our turnaround strategy. In the absence of the consent, we plan to close up to 200 stores per year over the next three years, which is allowed under the financing agreements. So the net result will be that we can achieve a good portion of our objective just over a longer timeframe.

Second, we’re working with our landlords to find an efficient and cost effective means to reduce rent expense. We have enlisted A&G Realty, a well known industry expert to assist us in this effort. Third, we’re taking steps to reduce our compensation expense by optimizing our labor hours in our stores and our store operating hours. Fourth, we’re regaining all other areas of our spending and identifying cost reduction opportunities for example we’ve renegotiated our ocean freight transportation costs and have successfully reduced them by consolidating into fewer carriers. We are also sourcing more of our fixtures from Asia at a lower total cost including transportation like the workbenches we used in our Fix It Here program. We’re reviewing our utility bills and rate plans and markets where deregulation exists and all of our spending on high volume supply items in our stores.

Additionally, we’re utilizing our procurement processes to further analyze and reduce cost such as marketing cost related to circulars and point of sales signage. Any costs that do not impact the customer experience are under review. The entire team is mindful of every dollar we’re spending and ensuring that we’re operating as efficiently as possible.

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

Joe Magnacca

Thank you, John. Our entire team is focused on driving results in our business and executing the detailed steps on the turnaround plan that is not the same we have a smooth road ahead. We recognize the significant challenges we still face with operational and financial hurdles, but we’re looking aggressively on all fronts to manage through those challenges and to realize the value through the RadioShack brand experience and position RadioShack for the dynamic future.

With that, let me turn over to Sally to moderate the Q&A portion of our call. Sally?

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Please standby with your first question which comes from the line of Greg Melich of ISI Group.

Greg Melich - ISI Group

Thanks for taking my question. In the beginning you talked about the vision for the future and the assortment of products that 30% or 40%, could you help us to understand how much that is already in the store and how that should effect the inventory per store and some of the other gross margin metrics as you get that fully rolled out?

Joe Magnacca

Yes, so, I would say that we used one example where RadioShack cell phone cases are currently in-store with our World Cup products, so very little has been put in store in Q1. Q2, you’ll start to see -- it starts to roll in and Q3 is really our target for that new content entering our stores. Much of that is private brand, but in many cases that I referenced we’re bringing in different lines of national brands as well to enhance some key categories where it makes sense. And from a margin perspective obviously the private brand comment supports that, but we’re also being very selective in national brands that we’re bringing in and trying to focus on products that are not priced to protect margin integrity as we move forward even on the national brand platform.

Greg Melich - ISI Group

And if I could on the inventory side, how much of an investment is it or is it net down or…?

Joe Magnacca

I’d say it’s pretty much net even from our perspective, we’re transitioning product out to allow to us to bring the new product in, so we don’t see any net effect on inventory.

Greg Melich - ISI Group

Thanks.

Operator

Thank you. The next question comes from the line of Matthew Fassler from Goldman Sachs. Go ahead, please.

Matthew Fassler - Goldman Sachs

Thanks a lot and good morning. I want to focus first on the wireless business as you find that you’re able to get on board with some of the carrier’s new plans, what impact is that having on the mobility sales, I guess sub-brand by brand as you go through?

Joe Magnacca

So, I think first the one that we didn’t really talk to of course the Sprint we’ve been on their new easy pay program and also their Sprint family program since April and what we’re finding is obviously there is a heavy marketing against that initiative. There has been strong demand inside our store to fully understand the benefit and clearly when the opportunity rises to move someone into an easy pay or family program it comes with greater margin potential for our business and more security against that business. So we’re excited with what we’re seeing inside the Sprint brand at this point.

Verizon just launched this week -- so in fact today, so we don’t have any clear indication on that and AT&T’s program as we mentioned we’re working on operating again, but all three programs really philosophically do the same thing which is allow a different type of screening or approval on a new phone device. The carriers are heavily engaged in determining who is eligible for that program. And as I mentioned what we really like about the program is it allows you to upgrade before your two year contract period as we’ve had in the past. So brings that customer back with more frequency.

Matthew Fassler - Goldman Sachs

Got it. And then second follow-up if I could. Can you talk about some of the differences in view of store closings, kind of what the key issues relate to I think just quantity, is it the notion of closing at all? Any color there would be great.

John Feray

Yes this is John, Mike as we’ve mentioned previously we did announce in late April that we were not able to get a consent on mutually agreeable terms. I think the best way to characterize our overall conversations with the banks is they’re very supportive, we have very solid relationships with our lenders regardless of what is written in the press, our lenders have worked very, very well with us to build a stronger RadioShack. And as we mentioned in the 8-K we will continue to have ongoing conversations with our lenders as we believe that closing stores are a key part of our overall strategic turnaround plan. As I mentioned in my prepared remarks currently we have estimating 200 stores to close in fiscal 2015, and we’ll be able to do over right at 600 over the term of the credit agreement. Just going to take a little bit longer to close those stores, but it is a key part of our turnaround plan and our lenders have been very supportive and productive in terms of our overall relationships and discussions.

Matthew Fassler - Goldman Sachs

Thank you.

Operator

Thank you. The next question comes from the line of Michael Lasser from UBS. Go ahead Michael.

Michael Lasser - UBS

Good morning thanks for taking my question. I want to circle back on the last one, what are the key sticking points between the company and the lenders that have resulted in a disconnect between number of stores that the company wants to close and the number that the lenders are willing to allow to be closed?

John Feray

This is John again. The overall, we’re not going to get into a lot of the details of the overall terms I just suffice to say that the overall terms, that were just not mutually agreeable at the present time. And as I mentioned we do continue to have discussions with our lenders as they’re a key part of our overall business to make us the stronger RadioShack in they are a key part of our overall turnaround plan.

Michael Lasser - UBS

My second question is you said, you feel like you enough liquidity in 12 months to enable your turnaround plan to work. What is your expectation for the progression of that turnaround? Is it going to be linear improvements? Are you more so anticipating that there will be some more exponential lift towards the holidays? And as part of that are you getting enough support from your vendors especially as some of the financial performances being challenged and I guess it becomes even more important as new key handsets are launched. So you feel like you’ll get enough of a fill and enough of vendor, enough of inventory allocation to really support your turnaround plans? Thank you very much.

John Feray

When you talk about our overall vendor the vendor community, I would have to say that our vendor community that we have been working very proactively with the vendors and they’re very excited about our overall turnaround plan. They’re working with us to take advantage of every opportunity to build a stronger RadioShack. And we feel like that based upon the relationships that are retail team driven, led by Paul Rutenis and in conjunction with Joe. We’re really developed a strong strategic relationships with our top vendors and we feel like that is, we’ve been very upfront, and clear about the overall turnaround strategy, so I feel like our vendor support will continue to be strong.

The earlier part of the question in terms of the trajectory of the turnaround for the business obviously in relation to the new product roll out as Joe mentioned earlier, one of the questions. Some of that product is coming in, in Q2, the majority in Q3. So we would be prepared for Q3 and Q4 and as we have mentioned we do anticipate the improvement in the overall sales and margins throughout the year. So probably a little bit more to the back half of the year versus the first half of the year.

Michael Lasser - UBS

Okay, thank you very much and good luck.

John Feray

Thank you.

Operator

Thank you. The next question comes from the line of Trent Porter from Guggenheim Securities. Go ahead.

Trent Porter - Guggenheim Securities

Hi guys, let me pick my most important questions. I was wondering if the comments that you have made on the call and in the liquidity statement. You sound fairly confident, in other words you think you’ve got liquidity for the next 12 months and this is predicated on the idea of improving sales and gross margin. I wonder if you could give us a any more of a glimpse or -- into the level of visibility or confidence that you have got in your ability to do this in other words maybe a qualitative glimpse into your internal budget and processes, the things that are entirely in your control like cost saving efficiencies, could you take a stab at quantifying that? And then you will be rolling out a new assortment, what kind of data assumptions are you using, do you have any test data or, maybe on to see what the profitability of a store might look like once all these colors are in place that you’re looking to in order to do this budgeting?

John Feray

Yes, when you look at, it’s kind of like on the same lines that what I said previously that we would see a little bit better in the back half versus the first half of the year. But as we have stated, we have reviewed our cash requirements, inventory position, all of the other working capital changes, the capital expenditures for the business. And in terms of the overall cost reductions, both what we have done and what we would anticipate to do, I’m not going to get into the level of detail and quantify those, but I will tell you from a qualitative standpoint. We are focused as I mentioned in my prepared comments on every dollar that does not affect the customer experience in a very pointed way.

I think some of the other items in the overall turnaround plan besides the store closures and the cost reductions we have mentioned the new products, but I’d just comment just briefly on the private brand and the investment that we are making in that overall business. This is very strong business for us, that is kind of a heritage thing for RadioShack. Our overall penetration and the overall sale, overall store, is about 25% and the opportunity to improve that in the future is very promising in terms of that standpoint related to the investments in both people and processes to kind of help that.

And as Joe mentioned, some of the Q2 -- some of the private brand product is hitting in Q2 where you’re going to see a larger percentage of that in the back half of the year and primarily the private brand is in the retail area in terms of the platform. So we do believe that there is quite a few qualitative things that are going on in the overall business that would lead us to feel that the back half of the year, would be a little bit better. Just as a reminder, third and fourth quarter last year, I wasn’t here, but we did not necessarily perform particularly well in the third and the fourth quarter. So what we’re up against in the third and fourth quarter based upon what we have in the pipeline, we feel a little bit better about.

Trent Porter - Guggenheim Securities

Okay. And just in the possibility that the results are lower than budget, you talk about it a little bit in the Q I was hoping you could slash out your contingency plan or levers that you believe that you'd have to pull in terms of liquidity?

John Feray

Yes exactly, obviously these are things that we wouldn’t necessarily, these are not things that we would initially go towards but we would make further reductions in our capital expenditures, further reductions in costs that could impact overall sales, the rent, marketing, other costs, cost areas there and you know potentially if things did not pursue very well we would look at raising additional capital in various ways and also reducing inventory levels which is the key part of our overall liquidity and then big investment. Obviously we would not want to do that as that would impact sales, and we also look as we detailed in the 10-Q to sell nonproductive asset for the company that are not producing return.

Trent Porter - Guggenheim Securities

Okay thank you. I’ll get back in queue.

Operator

The next question comes from the line of Dan Wewer from Raymond James, go ahead.

Dan Wewer - Raymond James

Thanks so Joe, let’s go back to March and April when the company decided that it would like to close 1,100 stores, can you tell us about the other 3,000 stores that you’re going to keep open, were those stores collectively profitable or cash flow positive?

Joe Magnacca

Yes, so going back to April. We looked at that 1,100 hundred stores last maybe a little differently than perhaps you might have from your view, we looked at it from a location basis, from a store profitability basis, from a duplication of store perspective, and we got that number based on that criteria within the balance of the stores obviously those results varied from store-to-store, so it wasn’t drawing a line in terms of profitability of stores to get to 1,100 leaving another 3,000 open, it was more about taking a much more strategic view of our real estate and getting to a place sooner than later. As John mentioned we had the ability to do that 200 stores at a time, over three years up to 600 stores. We just felt that it may be a much more significant advancement for the business to be able to do that much more quickly. So I wouldn't draw that conclusion that you are stating in terms of profitability necessarily.

Dan Wewer - Raymond James

What can you tell us about the 900 stores, the lenders are not allowing you to close in terms of either profit loss or cash flow loss?

John Feray

Yes, Dan, this is John. We’re not going to get into that level of detail. I think I just kind of answered that previously. Really, we didn’t get into a whole lot of specifics on whether one store was more profitable or less profitable than the other one. Overall, the terms that were presented were just not mutually agreeable to both parties in terms what we wanted and what they wanted, but I want to reiterate again that we continue to have very solid productive relationships with our lenders. They have supported us in every possible way it’s just that we did not find the terms on of the overall consent asset at that current time to be mutually agreeable for us to do that.

We felt like it was very important to communicate to the market that we had not been able to obtain a consent as previously noted in the last call, we had said that it would take about a month or so timeframe and we felt it was necessary to communicate at that time that we had not gotten a consent. Subsequent to that obviously as I mentioned earlier, a lot of chatter in the marketplace about the activities of the discussions, I would have to say that everything has worked, the lenders have really worked very well with us to build a bigger and stronger RadioShack. And as I mentioned earlier, we will continue to have discussions about proposed store closure with our lenders as it is a key part of our overall strategic turnaround plan.

Dan Wewer - Raymond James

Okay and just one real quick question on the 30% to 40% change in stock-keeping units that I guess you began in July, would you get the same type of trade payables relative to inventory on this private label product that compared to the other company average or would you have a bigger increase in that inventory -- a larger investment in that inventory build up?

John Feray

Dan, it’s John again. As you look at the overall inventory for private brand, in terms of the initial orders, we’ll probably take in a little bit more just because the overall flow for inventory to the overall payable just because the overall process to actually set the stores, but overall it will be relatively overtime over probably a three-month period will be relatively consent. We will receive the private brand inventory a little bit earlier than we would then allocate it. We’ll probably see the inventory come in and probably the Q2, early Q3 timeframe and then into our DCs and then allocate to our stores in the Q3 timeframe.

Dan Wewer - Raymond James

As you say and the payable inventory rate is not going to change?

John Feray

Overtime, it will not.

Dan Wewer - Raymond James

Okay, thank you.

Operator

Thank you. The next question comes from the line of Carla Casella from JP Morgan. Go ahead, Carla.

Carla Casella - JPMorgan

Hi, so I guess I want to just clarify on the last question, so your relationships with Quirky and other vendors your lenders, your payable terms will be similar to where they are on your current private label or similar to terms on your mobility business?

John Feray

This is John, again. The overall terms will basically be kind of market terms with Quirky and PCH basically normal operating business for the overall relationship. Nothing unique, nothing comparable to anything related to our overall carriers.

Carla Casella - JP Morgan

Okay. So it's not consignment like agreements?

John Feray

No.

Carla Casella - JP Morgan

Okay and then the store closure, does that include Mexico or the 200 just domestic and then how many would expect to close in Mexico?

John Feray

The total does not include Mexico and Mexico is about 270 stores, so it’s not really a huge number one way the other, it is not included in the overall number that we would -- Mexico closures are included in overall numbers and of course with the overall credit agreement.

Carla Casella - JP Morgan

Are you plan to close -- I mean you’ve closed a bunch of Mexico stores with quarters, do you expect that same rate for the remainder of the year like over 30?

John Feray

We do not anticipate or believe that we’d be at that level to the remainder of the year.

Carla Casella - JP Morgan

Okay great and then, have you considered or would you consider restructuring just to clean up the capital structure or do you still think you can under the existing structure that you have now?

John Feray

Yes, we’re focused on executing the overall turnaround plan and we believe that the 2018 credit agreement gives us the flexibility to implement our overall strategic turnaround strategy for RadioShack.

Carla Casella - JP Morgan

Okay great, and then just one last on housekeeping in the past you’ve disclosed what your receivables are from the wireless carriers, can you give us a ballpark what it will be today?

John Feray

Yes. I am sorry, I don’t have that number handy right now, but we can provide that at a later time.

Carla Casella - JP Morgan

Okay. Great, thank you.

Operator

Thank you. The next question comes from the line of Elie Radinsky from Cantor. Go ahead, Elie.

Elie Radinsky - Cantor Fitzgerald

Yes. The Fix It Here program sounds very interesting are you going to have to hire more people for that? Is it going to be a dedicated team? How’s that actually going to be working?

Joe Magnacca

It’s Joe. So I think it’s a good question, the program itself was something to talk, huge demand, demand are requested in our store. We also add dollars that we had some ideal time with the associates. So the way we compile that program pull together was taking some of our highly technical employees and training them and putting them through that 40 hour training program. And then supplementing some areas we’re appropriate with some incremental employees. The way we view the business is that it requires a minimal incremental labor investment to start and as that business grow we will look at adding labor in from our perspective by support to demand inside the business. So, arguably it’s minimal investment beyond our private label model.

Elie Radinsky - Cantor Fitzgerald

Okay. Great, can you talk about any contracts with national carriers that may be coming up? And also what you view the potential impacts from a potential to Sprint, T-Mobile in combination will have on you?

Joe Magnacca

Yes. I think we can’t release the dates obviously we’re confidential of our contracts. But we are in contract to the end of the year with all three carriers and we say that. The impact of potentially at Sprint and mobile connectivity is kind of interesting we’re a three carrier model. We do like, I’d say it’s a business the competitive spirit is out there within carriers. We’re not sure how that will affect us. We do know that on a previous -- our previous deal that AT&T made with Cricket which were both currently part of our lineup that business will go for the AT&T and remained in our stores. As it stands we really can’t comment on -- really can’t comment on what Sprint or Shop Inc. may do with that business. I would say that from a relationship point of view at the highest levels in all three organization, we feel very comfortable that with our relationship and feel that they are with us as well in terms of building that business. So we’re feeling good regardless to publishing transpires.

Elie Radinsky - Cantor Fitzgerald

Okay. And on the one hand you said that you’re very strong with -- and your top five seller of Apple material which would be very important as these potential has been by Apple right now. And on the other hand you mentioned that certain carriers had it in-house promotions that do not extent to you. How do you reconcile that? How do you become one and get preferred vendor relationships with some of these carriers to allow you to be at least on equal footing with some of their in-house operation? And what are your thoughts are going to be in a going forward with Beats, is it going to change from the economic perspective because in the past Apple has -- the margins for their product may not be equal for the overall margins for the company?

Joe Magnacca

Let me start may be -- we’ll start with Apple. And I would say that our relationship with group and Apple is very, very strong. We move to tier 1 relationship with Apple inside their business. We are incredibly supportive of what they are doing from a development point of view for our new product perspective. And probably more importantly we think people like Apple are valuing the talent we have in our store to be able to sell products really coming much more complex. So from the Beats perspective we’re also a pretty strong player in that Beats world we think that the reviewing of the two is quite interesting certainly for Apple, but it also we think helps us from a strategic book perspective. We believe we’re very well aligned with the folks at Beats and are happy that the team will remain in place to help run that business. I was on the phone with Grem within the minutes of the announcement, after congratulating him through email. I got a call back almost -- well, immediately within five minutes. So that just tells you the strength of our current relationship. And that’s what you asked about the carriers I am now lost for thoughts.

Elie Radinsky - Cantor Fitzgerald

Well, again I just want to make sure that the relationship I mean, without sort of having in-house promotion, they are not extending to you. And therefore you’re not playing on an equal playing field, how do we get to RadioShack playing on that equal playing field?

Joe Magnacca

Well first of all let me just clarify. The carriers are at a battle amongst themselves in a price war their programs that they are launching required a lot of technical support. And they are reacting in their competitive environment immediately. We then need to integrate like all others, as much as RadioShack, but all other national players are not on their program day one and really becomes and IT integration challenge for us to move that product. And I’d say we’re moving very, very quickly into that with Sprint’s program, both from an Easy Pay and a family perspective and as we announced earlier today Live is now in our system as well.

As a national retailer like any other national retailer we have to not operate on their system we have to operate on a system that allows us to work through all of their and so that adds a little bit of complexity for any national player, I would say that we will continue to work aggressively with each of the carriers to ensure that our technology architecture is a way to allow us to move, move in that direction quickly but is really is dependent on the complexity of the program, the IT integration at this point.

Elie Radinsky - Cantor Fitzgerald

Excellent, well thank you very much and good luck to you.

Joe Magnacca

Thank you.

Elie Radinsky - Cantor Fitzgerald

Thank you.

Operator

Thank you. [Indiscernible] Messer [indiscernible], go ahead.

Unidentified Analyst

Hi, good morning, just another question on the carriers, I think in the last K, you guys disclosed that a 144 million of the 200 million or so of AR was from the carriers, can you give us a sense of what the corresponding split is, as a percentage of your total payables that are coming from the carriers.

John Feray

Yes, this is John. In terms of the overall I think this is kind of related to that question that we had earlier, overall the AR for the quarter was about a 163 million in totality and the vendor and service providers was approximately about a 105.

Unidentified Analyst

And how about for the payables?

John Feray

In terms of, the overall payables was barely comparable on the overall carrier dollar amount for the overall payables was about 242 million in its, and it make sense because the overall, the mobility piece is about 50% roughly of our business, so you would anticipate that about 50% of that is in the carrier accounts payable. They also have the other merchandize payables and you also have just the overall loan operating experiences, insurance, and that sort of thing that rolls into the 242 million, so it’s a comparable number.

Unidentified Analyst

Okay, great, thank you.

Bruce Bishop

Okay, I think that’s the time that we have today and we appreciate if you have any questions you can follow-up with me. It’s Bruce Bishop and you can find my information on the Web site, thank you very much.

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