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RadioShack Corporation (NYSE:RSH)

Q2 2011 Earnings Conference Call

July 26, 2011 8:30 AM EST

Executives

Molly Salky – VP, IR

Jim Gooch – President and CEO

Analysts

Michael Lasser – UBS

Dan Wewer – Raymond James

Gary Balter – Credit Suisse

Scott Ciccarelli – RBC

Matthew Fassler – Goldman Sachs

Gregory Melich – ISI

Michael Corelli – Barry Vogel & Associates

Jeremy Brunelli – Consumer Edge Research

Chris Horvers – JP Morgan

Mike Baker – Deutsche Bank

Alan Rifkin – Barclays Capital

Carla Casella – JP Morgan

Brad Wakes [ph] – Coretta Capital [ph]

Emily Shanks – Barclays Capital

Brad Thomas – KeyBanc Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2011 RadioShack Corporation’s earnings conference call.

My name is Katina and I’ll be your coordinator for today.

At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Ms. Molly Salky, Vice President, Investor Relations. Please proceed.

Molly Salky

Good morning, everyone, and welcome to the RadioShack second quarter 2011 investor conference call and webcast. We’re pleased to provide the midyear update on our results and outlook.

With me on the call today is Jim Gooch, President and Chief Executive Officer. Before I pass the call to Jim, I’d like to take care of a few housekeeping items. We issued two announcements this morning. First was our release announcing a new agreement with Verizon Wireless to offer wireless services in our US company operated stores beginning September 15th. The other was our earnings release for the second quarter. We also filed our 10-Q with the SEC this morning. These announcements and the 10-Q filing along with the replay of this webcast are available on our IR site.

One note regarding our financial reporting; we completed the transfer of our remaining Sam’s Club kiosk to Sam’s during the quarter. With this transition, we’ve reclassified the Sam’s kiosk to discontinued operation. We also reclassified the Target Mobile operations into the Other category within our segment report. The Other segment now includes the results of our T-Mobile centers, sales to independent dealers, our dotcom site, our Mexico operation and other outside sales. Historical financial statements and comp store sales restated for the exchanges are available on our IR site and in our 8-K filing today.

Finally, let me recap the one-time charges in the quarter. First, a $3 million pretax, $1.9 million after-tax or $0.02 per share noncash inventory evaluation charge related to T-Mo inventory. This was reflected in cost of goods sold. The second was an $8.7 million pretax, $5.8 million after-tax or $0.05 per share related to the closure of our manufacturing plant in China. The $8.7 million breaks down as $1.2 million to cost of goods sold, $7.1 million to SG&A, and $0.4 million to depreciation. You will find a detailed reconciliation at these charges in our earnings release.

Now, 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 Q&A session. These statements are based on beliefs and expectations, and are subjected to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed at our various filings with the SEC such as our most recent Forms 10-K and 10-Q, as well as our news releases and other communications. The company does not undertake to update or revise any forward-looking statements which speak only as of the time they are made.

Following our prepared remarks today, we’ve allowed ample time to address any questions that you may have. Please limit yourself to one question and one follow-up, so that we can get to everyone’s question during the call. Do feel free to re-queue to ask additional question.

With that, let me turn the call over to Jim Gooch.

Jim Gooch

Thank you, Molly, and good morning, everybody, and thank you for joining our midyear call. I think as all of you could see from our release today, we have a lot to talk about. There is a lot going on in our business and I’ll walk you through some of those details, and we have some very excitement news to share with you regarding the new agreement that Molly mentioned with Verizon.

I think as I told you on our February call, we expected the first half of the year to be challenging, and it was. We knew we’d face some serious comparison challenges, especially in the second quarter including the continued impact of the T-Mobile breech, we had to shift in the handset launches of both the EVO and the iPhone, and the timing of many of our initiatives which we believe will have more of an impact in the second half.

However, in addition to all of these challenges that we knew we had going in, another issue which negatively impacted our performance in the quarter was a change in the Sprint upgrade policy. This created a one-time short-term drop in our Sprint postpaid business, and I’ll go into some of that detail in a moment. What I will say is, is that while our mobility business was clearly challenged in the quarter, I characterize these issues as temporary, as transitional, and they’ve either been resolved or they’re in the process of being resolved today.

So, with that, what I’d like to today is, I’ll run through our performance in the quarter, I’ll spend some time discussing our new agreement with Verizon, and then I’ll briefly update you on some initiatives and where we see opportunities for the rest of this year.

As I said, in the second quarter, the second quarter was challenging, both from transitional changes in our wireless business as well as a continued difficult trends in both the CE industry and the general economy. While these factors contributed to the sales decline in our US company operated stores, you do see as Molly mentioned with the change in the Other category as we opened additional Target Mobile centers during the quarter.

While our initial start with Target was a little slower than maybe what we had hoped, we now have the transition behind us, we have the rollout the Target complete, and the transfer of all the Sam’s kiosk complete. We opened an additional 594 kiosk in Target and ended the quarter with 1,481 locations. National advertising via the Target weekend circular that began in late May, this is helping us improve customer awareness and the team is now 100 percent focused on improving the business and maximizing our opportunity at Target.

As Molly mentioned earlier, the quarter also included charge associated with closing our manufacturing plant in China. This was an $8.7 million, noncash and cash charge, primarily for employee severance, inventory evaluation, and accelerated depreciation. I know many of you are aware of the volatility that can exist when you manage operations in China, and this moved an outsourcing model for the products that we produce in China. It’s going to provide us with greater flexibility, while at the same time, it’s going to reduce our risk, and we’re able to maintain our margins. Overall, the vendor sources, they were readily available and we expect no impact of products, no impact of sales or gross margin as a result of this change.

Important point here is that this move should in no way be viewed as a negative reflection of how we’re looking at our global sourcing operations. We’ll not only be maintaining global sourcing and buying groups in China, in Hong Kong, and in Taiwan, but in fact we continue to see opportunity to expand, continue to see opportunities to grow our private label business.

Now, I’ll spend a few minutes on our sales performance for the quarter. I’m going to breakdown our performance by product platforms; speak to mobility and signature and consumer electronics, those are the three platforms that we introduced during the first quarter.

First, mobility; this includes the postpaid to prepaid wireless business, along with tablets, e-readers and no-contract airtime. Our mobility business has been a focus over the past few years. We’ve grown up from being about a third of our overall business to this last year being almost half of our overall business. We’ll maintain that focus in the future, and clearly with the Verizon agreement in place, this is going to put us in a much improved disposition to capitalize and as growing segment in the industry.

We did struggle little bit with this business in the second quarter. We’re down 7.1%. That was driven by declines in Sprint and T-Mobile, partially offset by continued growth in AT&T, growth in tablets, along with e-readers. Year-to-date, the platform is still up 1.7%. As I said, several transitional factors play themselves out here during the quarter. We knew going in that we’d be impacted by changes in the timing of the handset launches. If you look at the first EVO handset launch, it was extremely successful for both us and Sprint. We launched that early June last year, the follow-up device that EVO 3D launch at the end of June this year, and we only had a few days of results in the second quarter and thus created a fairly difficult year-over-year comparison.

Also, we’re comping the launch of the iPhone 4. The iPhone 4 launched in our stores last June. The new iPhone, there is rumors out there of it either being third quarter or sometime this fall, but that also created a challenging year-over-year comparison for the second quarter. And then, we also anticipated T-Mobile’s underperformance to continue during the quarter. With the anticipation of a possible carrier transition during the quarter, we did take some steps to manage our inventory levels, has probably had some negative short-term impact on the business, but it did minimize our risk of an anticipated change in our arrangement with T-Mobile.

The unanticipated changes or the unanticipated change on top of these items that we knew going in unfortunately was the largest impact to our business, and that came from Sprint. At the beginning of the second quarter, Sprint made a nationwide change for all their customers to their upgrade model. The change involved delaying in early upgrade option for a broad group of customers. Instead of being eligible, they received this upgrade at the one-year mark, these customers say, were asked to switch to a higher cost plan, and then even after that switch, they were asked to wait an additional three months before they’d be eligible for that upgrade. The change had a meaningful impact to our business in the second quarter since about half of our overall business with Sprint is upgrade and a significant portion of those are being driven by these early upgrades.

The good news is, is the negative impact from the shift, it was temporary. We’ve now transitioned through the initial three months. And during July, we’re seeing our Sprint business return to strong positive year-over-year trends, similar to what we’re experiencing before the upgrade change. Add a little bit of context, add a little bit of scope to the Sprint performance, we compared the trend from the fourth quarter of last year and the first quarter of this year through our results in the second quarter. If, and I know this is a big “IF,” but if Sprint had remained consistent with the trend established over those past two quarters, both our total company sales and our total company gross profit dollars in the second quarter would have been higher than last year.

Now, I think the point here is that Sprint has been it is today, it’s a big part of our postpaid wireless business, it’s a big part of our overall business. And of our carriers, our relationship with Sprint is the longest and it’s the most well developed. But I think now through the addition of Verizon, through the continued development of AT&T, we expect our sales mix to be better balanced between the carriers and this is going to result in a more predictable model going into the future.

As I said, partially offsetting these negative shifts with strong sales trends from AT&T, where despite the iPhone launch with Verizon, we continued to see strong double-digit growth. We’re also seeing positive sales and gross profit from the launch of tablets led by the iPad 2. We launched the iPad 2 in 500 stores at the end of March, we then further expanded our tablet assortment in mid April, including the MOTOROLA XOOM, the BlackBerry PlayBook, and the Velocity Micro’s Cruz. For the back half of this year, we’re anticipating expanding our assortment, again launching new products that are include the Toshiba Thrive and the HP Touchpad.

So where does this leave us today with our mobility platform? Our Sprint business has returned back to transits more consistent with prior quarters. We’ll continue to transition T-Mobile over the next couple of months preparing for a mid September launch with Verizon. And as I said, the AT&T business that continues to mature, continues to grow, will becoming a more significant portion of our overall platform.

Net-net, the issues that impacted our mobility platform in the second quarter they’re either resolved or they’re going to be resolved in the back half with our Verizon launch. And we’re very optimistic of other mobility opportunity going forward.

Next, let me spend a couple of minutes on signature. This includes accessories, power, service in the technical categories. In general, these categories are high margin, they’re low turn, but they require minimal working capital investment to maintain. These categories are mature, but they remain a key driver of our profits, key driver of customer traffic, and represent a very loyal customer for our company.

We continued to stabilize the performance in many of these categories. We’ll look to improve the sales trends heading into the second half of the year. In the quarter, signature was down 5.8% on a reported basis, down 3.9% if you exclude the impact of the converted box market basket. Year-to-date the platform is fairly consistent with the quarter down 5.9% and again down 3.2% if you exclude the converted boxes.

I think unfortunately with the postpaid sales down, this had a negative impact on our wireless accessory trend, where we were realizing a double-digit increases in prior quarters, we’re actually negative in wireless accessories in the second quarter. With the improvement of the Sprint postpaid business through month-to-date in July, the wireless accessories has also recovered and were trading fairly flat for the month. We realized that that we aren’t where we want to be with these categories. You’ll see us continue to invest in this platform with the goal of offering consumers a full solution in connecting their mobility and CE products. You’ll see investment come in the form of improved in-star fixtures, we’re going to be enhancing our online offerings, we’ll be doing more targeted marketing into this customer, and we’ll increase our investment in expanded assortments. Many of these initiatives, they’ve either just begun or has scheduled to rollout in the third quarter, and we’ll expect to realize benefits of these actions in the second half.

Now, I’ll move on to our CE platform. The platform was impacted by difficult overall CE trends. We’re down 17% in the quarter, we’re down 15.8% year-to-date. For references, this platform makes up only about 20% of our revenues, and it carries a margin rate that’s well below our company average. And as a result, it only represents less than 10% of our overall gross profit dollars. These are largely mature, sometimes declining categories, and we’re going to look to manage these opportunistically, and we’re going to look to maximize our profit in the CE platform.

We expect the platform sales to continue to decline this year, but still see openings to participate with select products and with select promotions. Our goal here is to optimize this assortment, we’re going to use these categories to opportunistically drive traffic and where possible improve brand and improve price perception. However, it’s important again to know here that unlike many other CE retailers, these categories, they don’t significantly drive their overall economics and therefore we’re not going to be needlessly chasing declining categories.

Now, looking at gross profit for the quarter, gross profit declined to $436 million. That’s a margin rate of 46.3% if you exclude one-item items. Year-to-date gross profit was $890.7 million, with a gross margin rate of 45.5%, if you exclude those one-time items. In the quarter, gross profit dollars were certainly impacted by sales declines. The decline in gross profit margin reflects a lower gross margin at our Target kiosk this year compared to last year when the program was still on a pilot phase.

Within our US company operated segment, gross margins were actually relatively flat for the quarter, where we saw our initiatives offset the negative mix impact that that was – as a result of selling more low-margin handsets.

Now, I’ll move on to SG&A expense in the second quarter, it increased to $357.2 million, that’s excluding one-time items. The increase in SG&A expense, it reflects higher cost to support the expansion of the Target mobile kiosks. These higher costs were partially offset by lower advertising, lower rent, and lower occupancy cost. One additional note on SG&A, we’ve shifted some of this advertising savings from the first half to the back half of the year. This is going to help us support the Verizon rollout, but we still anticipate being within our prior guidance on our annual advertising spend.

Now, I’ll move on to the balance sheet. We ended the quarter with cash balance of $552 million. Cash was impacted by the use of a $101 million for the repurchase of stock during the quarter. We remained focus on strengthening our capital position and we’re committed to returning value to our shareholders.

Inventory up $727 million at quarter-end, that’s up 13% from last year. This reflects higher wireless inventory levels, particularly in smartphones to support not only the continued growth of the business in the corporate stores, but also the Target rollouts. This combined with some specific category investments, mainly in the signature platform, where again we view that as low risk and high potential return.

Our balance sheet and our cash flows it also continues to reflect a shift in our sales mix towards our wireless business. We’ve described this in the past, but the wireless transaction, it’s not the typical retail, it’s not the typical CE transaction. And as a result, it impacts our balance sheet differently than that typical transaction. Because of that commission model that’s inherent in the wireless business, more dollars tend to remain in the balance sheet in accounts receivable, which would if it was a typical retail, a typical CE transaction be converted to cash earlier, and as a result our cash balance still tends to slightly trail the performance that you see on the income statement.

With that, I think I’ll move on to what we view certainly as our very exciting news, and that’s the addition of Verizon into our stores nationwide. This new agreement is a substantial win for our customers, substantial win for our employees and for our shareholders. Our consumer proposition as a multicarrier retailer it’s going to be greatly enhanced with the addition of Verizon. Consumer awareness, consumer appreciation for our multicarrier retail model it’s growing everyday. And I think our ability to serve those customers with the best carriers, with the best rate plans, and with the best devices and accessories is going to be significantly improved with our addition of Verizon.

We’re expecting to begin offering Verizon products in our stores nationwide beginning on Thursday, September 15th, with our first national circular droppings on September 25th. Our assortment was going to include both prepaid and postpaid wireless as well as wireless accessories and tablets. As I mentioned earlier, up until this time, the success we’ve had in our mobility business has been driven by a portfolio that didn’t include this industry leader. I think combined with what it previously been under develop businesses with both AT&T and T-Mobile.

With AT&T, we’ve now anniversaried the iPhone launch. And as I said, this businesses continues to improve everyday. With T-Mobile, we launched our relationship in the third quarter of 2009, and obviously if you look at the past few quarters, we’ve struggled with their performance. So now with the addition of Verizon, if you look at the AT&T business that just continues to mature, continues to grow, and Sprint returning to the prior strong positive trends, we think we’re not only better positioned for growth but also our business is going to become more balanced and it’s going to become more predictable.

Important to note here that is that we made absolutely no changes to our existing agreements with both AT&T and Sprint as a result of adding Verizon. Additionally, based on this new agreement with Verizon, this new business, it’s going to come into our mobility platform with similar per unit economics as compared to our existing agreements.

Now, maybe a few comments on T-Mobile. In conjuncture with this transition in the wireless carriers, we’re going to no longer be offering the T-Mobile product after September 14th. And we did recognize that $3 million one-time noncash charge in the second quarter related to T-Mobile inventory. This was going to be a piece of what’s going to be a larger one-time both cash and noncash charge in the third quarter. This is going to include a payment to T-Mobile.

So why a payment to T-Mobile? As you know, the underperformance of T-Mobile has been a significant drag in our business since the fourth quarter last year, and this drag it’s continued into the first and the second quarter of this year. In our view, we had a number of viable options. We could have continued to pursue our breech of contract allocations. In our view, we had strong position relative to multiple breeches. We could have waited to see if the AT&T – if the acquisition of T-Mobile was going to be completed, which certainly may have resulted in our ability to eventually change carriers or we could have went down the path that we did which was working with T-Mobile to wind down the relationship.

Our overall goal here was to move our business forward, to move our business forward as quickly as possible, trying to do that with the most certainty and in orderly and in as seamless matter. So while we felt good about the breech position, we took into consideration that that potentially significantly will cost uncertainties with any legal process and the time that might be involved to work through this option.

We also believe that there were uncertainties involved in the AT&T acquisition process. I’m sure many of you saw the latest article in the Wall Street last week. But I would say that even if that deal goes through, there was uncertainty as to how long, well what was going to be the time to finalize the deal and then what was going to be the time to transition our business on the back side of that.

In our view, this outcome, it provides without question the most certainty, it provides the best timing, it provides the most orderly transition with the least amount of risk, and all of this coming at an economic cost that we felt we could justify. I think importantly here that we felt this option that it put us in the best position to have a seamless transition of the carriers, with the goal of having no gap in product, no gap in services available there to our customers. All-in, we’ve viewed this as the best option for both our customers, best option for our store teams, and the best option for our shareholders.

One additional note on the T-Mobile relationship; even though we’re going to no longer offer T-Mobile products and services in our company operated stores after September 14th, we are going to continue our relationship with T-Mobile by offering them in approximately 680 of the Target Mobile centers.

Now, maybe I’d like to provide a quick update on some of our initiatives that we have planned for the rest of this year. You’ll recall in our core business strategy, we’re looking for mobility and connected devices to drive our growth, while we’re looking to stabilize the signature categories and opportunistically invest in the traditional CE products.

In mobility, we’re taking advantage of our multicarrier retail position in outstanding customer service. We’re looking to continue to position ourselves as a wireless authority in the market; we’re going to further invest to drive awareness and consideration by allocating more of our advertising dollars towards wireless; you will also see us continue to be price competitive across the board punctuated by some market leading offers, maybe similar to some of the ones you saw at the end of last year; and certainly I think the addition of Verizon it’s only going to strengthen all of these positions.

We’ll also continue our focus on building profitable baskets on driving top line growth through the attachment of accessories, through the attachment of features. We saw our overall attach rate improve slightly in the fast half, but we still know that there is room for growth. To capture this opportunity, we’re going to do a number of things differently in the back half of the year, where we’re giving our associates the right product at the right time to attach where we’re expanding our accessory assortment, we’re making sure that we have the right accessories for those key end products, and also as a part of this, we’re going to be offering more compelling product bundles to help our associates not only attach but to try to attach multiple accessories with each end product.

We rolled out a couple of programs. One is our monthly billing option for service warranties in the second quarter. The early read on this is positive. It gives customers the option to not only pay in a one lump sum which was our only option before, but now they have the option to pay in small monthly increments. We’re also about halfway rolled out with our wireless data swaping capability. This is another important step towards improving our mobility consumer by providing them with their full solution. And, finally, we’re also testing different attaching centers for the field. Our current incentive structure is not giving us the results that we want and so we’re testing out some different approaches here. We’re planning on getting a read on these tests and look to rollout an improved program either in the fourth quarter of this year or the first quarter of next year. I think in summary, our attach remains a real opportunity for us and our entire team is very focused on finding a better solution.

Now, let me spend a couple of minutes on our outlook for the rest of this year. As I’ve said in our earnings announcement today, we’re comfortable with the current range of analyst estimates for the back half of 2011. Current First Call full diluted EPS estimates has us at a range between $0.81 and $1.07. Of course, this range excludes any one-time charges that would be related to the T-Mo transition. Our pace with improvement in the back half, it’s going to be dependent on our ability to transition out the T-Mobile business and limit any negative impact to the business at the end of that transition, and then quickly followed up by the ramp-up of the Verizon business. I think while long-term without question, I see the addition of Verizon in our stores just as a huge, huge win. My near-term outlook is it’s probably somewhat tempered by the complexities that that I know we’re going to face with exiting one carrier and trying to quickly ramp up another carrier.

We acknowledge that that initially the consumer awareness of Verizon in our stores it’s going to be low and that raising that awareness during the fourth quarter it’s going to have some challenges. The fourth quarter tends to be a very noisy time of the year with a lots of competing messages in the market. But I’m confident with their combined partnership team that’s been put together between us and Verizon that we can realize some significant opportunity and we still have in this business not only for the back half, but I’m very excited about the long-term potential with this much improved mobility assortment.

So, with that, that concludes my prepared remarks. And, I think, operator, we’d like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We ask all questionnaires limit themselves to one question and one follow-up. You may reenter the queue after your initial question has been addressed. Your first question comes from the line of Michael Lasser representing UBS. Please proceed.

Michael Lasser – UBS

Good morning. Thanks a lot for taking my question. So it’s actually a two-part question. Number one, the business is going to change dramatically over the next couple of years. It’s more of the growth like you said comes from the mobility business. Can you give yourself a longer-term flint into what the margin structure for the business is going to look like?

As we’ve seen over the last couple of years more of the growth is coming from the wireless business means you have to see more commissions to the sales associates, the SG&A rate rise puts the pressure on the overall – on the overall. So what does that mean for the longer-term?

Jim Gooch

I think there is a few things there. And I think we’ve said before that even though that wireless business that the margin rate tends to be slightly under our company average, it’s still a very healthy margin rate if – certainly if you compare it to other CE products. I think as I’ve said, with adding Verizon, you should expect a per unit economics to be consistent with where the other carriers were. So there has been some margin pressure with what growth in wireless and I think certainly with some of the mix – with some of the lower margin handsets. That’s why it’s so important with our focus on signature, that’s why it’s so important with our focus on attach, a lot of those accessory products are very healthy margin. And to maintain our margin structure, we’re going to look to maintain that market basket profitability by having a nice mix between end products and accessories.

Michael Lasser – UBS

And have you done work to get a sense for how you index the Verizon within your store locations to get a sense for if you get a proportionate number of the customers relative to the overall market?

Jim Gooch

Yes, we’re very excited about the potential here. We have done some of that work, but remember that that we also had some of that work from when we had Verizon in our stores before. So we certainly saw some negative impact in a lot of our stores when we ended up pulling out Verizon certainly in some parts of the country. And so I’m very excited, we’ve done some initial works on some indexing, but I think more of that work is going to come here in the next 30 days or 60 days.

Operator

Your next question comes from the line of Dan Wewer representing Raymond James. Please proceed.

Dan Wewer – Raymond James

Thanks. Good morning, Jim.

Jim Gooch

Good morning. How are you?

Dan Wewer – Raymond James

Good. Some questions about Target. The figures in the second quarter obviously only include a partial period of revenues and then gross profits. You also alluded to the fact that year-ago you had above average gross margin rates in Target that you’re unable to continue through this year. Can you give us a sense on an annualized basis what these 1,500 stores could generate in revenues for RadioShack? And, again, I know that you’re not providing the details on the profit split, but give us a sense as to how significant or insignificant the earnings benefit could be.

Jim Gooch

Yes, I don’t think we have shared that specific information. But what I would say about Target is, we had some initial upfront funding relating to the rollout in the task that were being amortized over the first year. So that was really the driver in large part of the margin rate. What you see in this last quarter is probably more of a run rate margin rate of what you can expect going forward. I’ll also say that we’ve been very pleased with the improvements that we’ve seen certainly over the last several months.

This was a very challenging rollout to get to almost 1,500 stores in the time period that we did, I think a lot of our resources on Target were very focused on the rollout. And now we’re getting that behind us and getting the Sam’s transition behind us, the teams now are very focused on running the business on a day-to-day basis, and fortunately we’re seeing the improvements in the business as a result. So I would hope that when you can expect us to see is over the next year that business continued to grow and that business continue to mature and probably maybe a year or so from now, you’ll see a better run rate of what you can expect in that business going forward.

Dan Wewer – Raymond James

Well, let me ask the question this way. It looks like in the segmented information that the operating profits from I guess what you call now the Other category dropped about what $15 million year-to-year. In your guidance for the second half of the year, are you assuming that this segment remains unprofitable?

Jim Gooch

Well, I think what you see, and I’m not sure the exact numbers you’re looking at, but we did give some guidance on the profit decrease that that we thought was going to have in Sam’s. We’ll be breaking the Sam’s business out to be in discontinued operations, and so you should get a better indication of what the Target business is doing with those other businesses in the back half. But certainly with the rollout of Target and the infrastructure build as we said it was going to be challenging to show a bottom-line profitability. Now with that behind us and with the business growing, we do anticipate going forward that that Target will be a EBITDA positive business for us.

Operator

Your next question comes from the line of Gary Balter representing Credit Suisse. Please proceed.

Gary Balter – Credit Suisse

Thank you. First of all, congratulations on getting Verizon.

Jim Gooch

Thank you, Gary.

Gary Balter – Credit Suisse

And also listening to the conference call is much more positive than reading the press release, because of what you mentioned about Sprint. So it was a lot better after listening to your prepared statements. Just a follow-up on Verizon; as you look at the market, what’s the cost of getting those customers or trying to get into that business having falling behind? I am like as you mentioned, you’re moving some advertising to second half. Like as we think about the profitability impacts from getting into Verizon, will lot of the advertising charges or impact offset the profit potential? And as part of that, do you see driving in that Verizon traffic had possibly helping in that third category which has remained so weak?

Jim Gooch

I think your answer is definitely yes to the second one. I look for Verizon to certainly help with driving traffic. I’m not so sure about those traditional CE products, but definitely with the accessory business, I think Verizon is going to have a positive impact there. I think as far as the back half, it depends how quickly we can trend – how well we can transition out of one and ramp up the other. I think without question going forward in long-term, Verizon compared to the assortment we had in there it’s going to be significantly better. It’s just a matter of I think – if you look at the aggressive timeline that we have in front of us, we have about 45 days.

This was obviously very confidential, so only a very few number of people knew where we were going through these negotiations. And so now over the next 45 days, I think significant number of folks on both sides, the teams are going to beginning together and doing everything we need to do to prepare ourselves for this launch, but that’s going to be a significant amount of work, and we’re still very hopeful I think that this is going to provide some upside for us in the fourth quarter. But I’m probably little tempered as to how much it’s going to be in the fourth quarter versus my high expectations of this business going forward into next year.

Gary Balter – Credit Suisse

Okay, thank you.

Operator

Your next question comes from the line of Scott Ciccarelli representing RBC. Please proceed.

Jim Gooch

Good morning.

Scott Ciccarelli – RBC

Hi guys. Scott Ciccarelli. How are you?

Jim Gooch

Good.

Scott Ciccarelli – RBC

Good. I’m curious that you’ve been trying to work on building a relationship with Verizon for quite sometime. I’m curious what changed? What was the catalyst that kind of finalizing a deal here, Jim?

Jim Gooch

You can say, for quite sometime, we started with the Target business last year. And as I’ve said, we just finished that rollout in the second quarter of this year. So it’s only less than what five years ago or about five years ago that the relationship was originally terminated here. So we’ve been working through both sides. I think we’re certainly very impressed with what Verizon is doing on their side and I think they recognized a benefit that we can provide them with their 4,500 points of distribution. So I don’t know that anything changed, it was just the process that we’re working through, and we had told you before that we had some contractual limitations on our ability to bring in other carrier, and so we’re able to work through that. And I think with the performance of – from both teams and both teams very excited about working together. I guess if you say anything changed, that’s what changed.

Scott Ciccarelli – RBC

And you said the economics are pretty similar. Is there anything else unique about the Verizon relationship that we should be aware of?

Jim Gooch

No, I don’t think so. I think pretty consistent with the existing deals.

Scott Ciccarelli – RBC

All right, great. Thank you very much.

Operator

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

Matthew Fassler – Goldman Sachs

Thanks so much and good morning.

Jim Gooch

Good morning. How are you?

Matthew Fassler – Goldman Sachs

Good. I want to focus on gross margin particularly at the core RadioShack stores. If you indicated that gross margin was flat year-on-year and you haven’t always spoken about the gross margin rate in that business, so if you can give us a sense as how that compared to the run rate you saw in the first quarter and I believe from the year-to-date numbers that it was better, and also how the gross margin rate in that business was tracked over perhaps a longer period of time so we can get a sense to whether this in fact marked an inflection point in that metrics?

Jim Gooch

It certainly was better and we tried to call that out just because of how meaningful the other margin rate impact was on our whole business. I think there is several things that you have there. Even though the business maybe from a top line perspective in some areas like signature maybe aren’t where we want to be. I think some of the things we’ve done from an assortment perspective and some of the things from an attach perspective, the overall margin rate has improved there.

Certainly the mix with those traditional CE categories tend to be lower margin rate and so that helps your overall mix. And then our margin rate within wireless I think is more normalized at this point as we’ve now anniversaried the launch of iPhone and some other lower margin handsets. So I think going forward, the margin rates that you’ve see in the second quarter are probably a better indication of the trend that you should hopefully see going forward in this segment.

Matthew Fassler – Goldman Sachs

Has there been another quarter in recent memory when your gross margin in that segment was not down?

Jim Gooch

Yes, I think if you go back probably 18 months ago, two years ago, we were seeing gross margin growth, the first couple of years definitely Matt that I was here, we’re seeing margin rate growth. And then I think with the growth in the wireless business when it started to grow 36% last year and that mix impact that it was having on the total business that’s when you start to see some margin rate deterioration.

Operator

Your next question comes from the line of Gregory Melich representing ISI. Please proceed.

Gregory Melich – ISI

Thanks. Just want to ask another question on the Verizon terms, you said that the terms from margin structure is similar. How about the product availability? When Verizon gets a new phone, you get at the same time, or is that still depend on who’s phone and that open a negotiation?

Jim Gooch

Well, it’s always going to be somewhat of an open negotiation, but certainly both parties I think going in would assume that that we’d end up with a full assortment. I think the initial assortment like I said we’re working through that right now just because of the tight lead times and the availability with some product. I can’t commit to you today what the overall assortment is going to look like on September 15th, but we’re certainly planning on having the majority of their top devices.

Gregory Melich – ISI

Great. And then same question on the tablets specifically, you mentioned some of the products you have come in the second half are also starting with just 500 stores with the iPads. Is that – is the plan to have it at all stores or how are you thinking about that from an inventory perspective?

Jim Gooch

I certainly would love to have it more stores. I think our relationship with Apple continues to improve as a result of our performance. We obviously didn’t have it at any stores, so 500 was an important first step for us, and we’re in negotiations – we’re in discussions with them right now about what a future assortment may look like.

Operator

Your next question comes from the line of Michael Corelli representing Barry Vogel & Associates. Please proceed.

Michael Corelli – Barry Vogel & Associates

Hi, good morning.

Jim Gooch

Good morning.

Michael Corelli – Barry Vogel & Associates

Just a question about your cash uses; obviously you’ve been relatively aggressive in the share repurchase area in the second quarter and last year, and your stock is still selling at a very low multiple of EBITDA, you’ve still got a pretty healthy cash balance, some good cash generation. Do you think the share repurchases is going to continue to be a focus for the company and are there any real cash requirements the company has as far as growth initiatives or anything and are you considering potentially raising your dividend?

Jim Gooch

So I think we obviously believe that share repurchase was an important piece to returning some value to shareholders. I think it remains an option going forward as well as a dividend, we’re going to be having those discussions, and hopefully be able to communicate something here in the back half as to what a long-term capital allocation might look like. As far as requirements, I think we’ve given guidance on capital for this year and we still remain consistent. I believe I insist between a $100 million to $125 million. So any requirements that we see an investment in the business would come within those numbers.

Operator

Your next question comes from the line of Jeremy Brunelli representing Consumer Edge Research. Please proceed.

Jeremy Brunelli – Consumer Edge Research

Hi, two quick questions. On the Verizon transition, is it possible for you guys to draw any analogies to a time where you guys went through another transition, and maybe kind of give us some color on what – where you see the biggest risk are for the second half around the transition aside from just increased advertising expense and driving awareness?

Then, secondly, given your tablets are relatively new, what has been your experience so far, kind of like the unit economics around attachments and margins, et cetera?

Jim Gooch

It’s interesting on your first question, we have gone back, and we’ve had two transitions, but this one is not exactly like either one of them. So if you recall, at the end of 2005, RadioShack had two carriers, it had Verizon and it had Sprint, and they made the transition away from Verizon and brought in AT&T. And then, in the third quarter of 2009, we added T-Mobile. So this was maybe more consistent with the first one where we’re replacing one carrier with the other. T-Mobile was adding a third carrier, but I think in this one when you look at adding the number one carrier and replacing the number four carrier, very different.

And I think our position in the market from a consumer perspective, from a consumer awareness of being far more meaningful in the overall wireless business very different than where the company was at the beginning in 2006. But I do think we’re going to draw in some of those experiences definitely of when we added in T-Mobile upfront from an executional perspective and from an inventory perspective and from a fixturing perspective and from an advertising perspective, we’ll draw on those experiences.

As far as the tablets and the economics around that, you know I think one thing we’ve seen is, in our minds more similar to our wireless transaction of it tends to be more of a high-touch, high-service transaction which fits very well into our stores. And I think as a result of that, we’ve seen very attractive attach rates with those products. And then from a per unit economics, I think even though it tends to be a lower margin rate, we’re not seeing a high amount of cannibalization in other categories. So I do think it tends to be gross margin accretive versus maybe with some of the lower end hand devices, wireless devices where it tends to cannibalize other devices.

Operator

Your next question comes from the line of Chris Horvers representing JP Morgan. Please proceed.

Chris Horvers – JP Morgan

Thank you and good morning.

Jim Gooch

Good morning.

Chris Horvers – JP Morgan

Wanted to follow-up on the commentary around July sales; is it fair to say to the mobility platform is positive overall, given that rebound in Sprint as you mentioned is your most developed brand on the wireless side and it could be maybe 20% of sales. So is that big enough to pull comps up in the mobility platform up to positive overall?

Jim Gooch

Yes, it is.

Chris Horvers – JP Morgan

And then as – and then as a follow-on to that, do you think that – I mean do you think that the EVO launch in late June that you should – we should maybe normalize from that, maybe there was a delay with EVO launch later. There is this pickup in July, maybe trends are running a little bit above, are you seeing something else in the business that suggest that that mobility positive comp should sustain itself even though Verizon is not coming until late September?

Jim Gooch

We’re actually talking through that yesterday. Certainly you see the delayed launch with EVO and the impact of into July, and then you’ll also see very aggressive pricing in our stores from the original EVO. So the combination of both of those devices are driving the strong performance from July. Now we’re still comping fairly strong performance last year from that EVO launch. So I think overall it will normalize out. It definitely will at some point. But so far I think the early indications are the device that we’re comping being the original EVO 1 is looking like it’s going to be at least in our stores probably stronger than the follow-up device. And, so hopefully, the combination of having both devices in our store this year will provide strong comps going forward against the original EVO 1.

Operator

Your next question comes from the line of Mike Baker representing Deutsche Bank. Please proceed.

Mike Baker – Deutsche Bank

Hi. Thanks guys. I was wondering if you can help us understand your view at least on the relative size of the Verizon opportunity versus T-Mobile, how big did you see the end user market for that business and how much bigger in your estimates is Verizon versus T-Mobile? Just trying to get a sense as to how meaningful this could be for you. Thanks.

Jim Gooch

I don’t think we’re going to give anymore guidance other than you can probably take a look at Verizon share of the market versus T-Mo share of the market and get some indication of what the opportunity might be. As we’ve said before, we’re operating a business here trying to drive mobility growth fairly successful at it last year with a 36% increase. We’re doing that with a business in a large part was being driven by the number three player that time being Sprint that the AT&T business was continuing to mature last year. But at the beginning of the year, we didn’t have iPhone in very many of our stores. We rolled that out last year. That business continues to mature the back half of this year into this year, so we’re very hopeful that come another six months, 12 months from now that that we’ll have AT&T business that that will be more mature than it currently is. And then I think depending on the ramp up of Verizon, depending on how long that takes to gain their fair share will end up with a business that’s more balanced until what you see in the industry between those three carriers.

Mike Baker – Deutsche Bank

Okay. We can make some estimates there. As a follow-up – and do you – what do you think the incremental labor costs are going to be with Verizon, assuming I guess – I assume you’re thinking making out more traffic and more sales, so are you going to need to add more labor hours around that?

Jim Gooch

Well, certainly if we drive more top line business, I think the per unit economics, and I we’ve talked about this before even with the commission and the labor hours. This is a time intensive transaction, this is a high-touch, high-service transaction. So as it fits into our mobility model that as we drive more business in mobility, it does sometimes require more labor. But I think our overall economics should still be fairly consistent with how you’ve seen us grow mobility over the last 18 months.

Operator

Your next question comes from the line of Alan Rifkin representing Barclays Capital. Please proceed.

Alan Rifkin – Barclays Capital

Thank you very much. Jim, do you anticipate any cannibalization effects on the current carriers AT&T and Sprint as a result of you adding Verizon?

Jim Gooch

I’m sure we’ll have some. But I think when we rollout T-Mobile, I think having a multicarrier is that right consumer proposition. So even though we could see some cannibalization, we’re convinced that having that right consumer proposition in there will raise the entire business. And even though maybe a couple of our existing carriers might end up with the smaller piece are going to be end up with a smaller piece of a bigger pie. And so we’re hopeful we’ll be able to continue to drive all three of the carriers.

Alan Rifkin – Barclays Capital

Okay. And as a follow-up, would this transition most closely resembling the transition on January 1st of ’06 when you moved out of Verizon, can you maybe just provide a little bit of color on the timeline back in ’06 as to how quickly you were able to ramp up the new carrier when you got out of Verizon and into Sprint?

Jim Gooch

Yes, Alan, I agree with you that it most closely represents that. But the state of the company is so much different today than what it was then. I think we were operationally broken, we were going through store closures that was before my time where we were going through significant SG&A reductions and so there definitely wasn’t a focus on this business. If you look at that time it probably took a couple of years to ramp up that business. I’m not anticipating that it’s going to take us that long to ramp up Verizon. I think also Verizon is – their brands obviously are very strong, our brand within wireless is much stronger than what it was at that point. So I think we’re getting some learnings out of that, but I wouldn’t anticipate to taking us long as it did in ’06 and ’07.

Operator

Your next question comes from the line of Carla Casella representing JP Morgan. Please proceed.

Carla Casella – JP Morgan

Hi, one housekeeping item. On closing China, what would have been the fixed cost associated with that business that you’ll no longer have to carry?

Jim Gooch

Well, we had a manufacturing facility in several hundred people that worked at that facility. And what I would say is all those costs were rolled into our gross margin. And what we’re saying is we’re able to go out into the marketplace and purchase those products so that’s going to come in at similar margin rates to what you would have seen in the past.

Carla Casella – JP Morgan

Okay. And then on the Verizon agreement, the economics of that versus T-Mobile or versus the prior Verizon agreement, you mentioned they were comparable with T-Mobile or to the prior Verizon agreement?

Jim Gooch

More comparable to AT&T, Sprint, and T-Mobile to our existing deals.

Operator

Your next question comes from the line of Brad Wakes [ph] representing Coretta Capital [ph]. Please proceed.

Brad Wakes – Coretta Capital

Hi guys. I’m sorry. All my questions have been answered. Thanks.

Jim Gooch

Okay. Thanks Brad.

Operator

Your next question comes from the line of Emily Shanks representing Barclays Capital. Please proceed.

Emily Shanks – Barclays Capital

Good morning. I was hoping you can –

Jim Gooch

Good morning.

Emily Shanks – Barclays Capital

Hi. I was hoping if you could give us a little color in terms of where you’re comfortable operating this business on a leverage basis? And related to that, as we look at the 100-ish million of share repurchases that happened during the quarter and your commentary that you are contemplating a dividend, if we should how we should think about the sizing of that shareholder friendly action?

Jim Gooch

I don’t think we’re going to be giving anymore guidance on leverage today. I think we’re very comfortable with the position that we sit in today. We’ve replaced the bonds that we had to payoff early with the facility, with the new bonds. We’ve gone through over the last, I don’t know, roughly year or so with the $500 million of share repurchase. So it’s a conversation that that we’re going to be having going forward, the mix of share repurchase and dividends. And like you said, I hope to be able to communicate you something on to everybody here in the back half of this year.

Emily Shanks – Barclays Capital

Thank you.

Operator

The next question comes from the line of Brad Thomas representing KeyBanc Capital Markets. Please proceed.

Brad Thomas – KeyBanc Capital Markets

Thanks, good morning. Just want to follow-up on the transition over to Verizon. And, Jim, I was hoping you could just talk a little bit more about some of the costs involved with the transition. Obviously you’ll have to do training and I would assume update systems. I am assuming you would lose a residual payments that you’re getting from T-Mobile. So just following up another quick question, at what point would you expect this transition to turn accretive for the company rather than being one where you incur more costs?

Jim Gooch

Certainly training is going to be a cost. From an IT perspective the benefit we have is we did do some of that work with the Target rollout. So there is not significant costs in any IT capital work that certainly has to be done will be done within the prior guidance. There are some economics that will change hands between T-Mobile and Verizon, but I certainly anticipate from the volume and from the economics that we’ll receive from the new business going forward that hopefully Verizon will quickly become accretive to the overall business. Whether that happens this year or next year, it just depends on how quickly we’re able to ramp up the top line business. But certainly next year I would anticipate it being accretive.

Brad Thomas – KeyBanc Capital Markets

Great. Thanks Jim.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back to Mr. Jim Gooch for closing remarks.

Jim Gooch

Well, thank you, everyone. I appreciate the participation and all the questions today. I think if you have any further questions, please call Molly with any of your follow-ups, and we’ll try to help you out. So once again thank you very much. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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