RadioShack Corporation (NYSE:RSH)
Q3 2011 Earnings Conference Call
October 25, 2011 16:30 ET
Molly Salky – IR
Jim Gooch – President and CEO
Dorvin Lively – EVP, CFO and Chief Administrative Officer
Matthew Fassler – Goldman Sachs
Chris Horvers – JPMorgan
Patrick Palfrey – RBC Capital Markets
Greg Milech – ISI
Dan Wewer – Raymond James
Michael Lasser – UBS
David Schick – Stifel Nicolaus
Alan Rifkin – Barclays
Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 RadioShack Corporation’s Earnings Conference Call. My name is (Anisia) and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)
I will now like to turn the call over to Molly Salky. Please proceed.
Thank you, operator and good afternoon everyone and welcome to the RadioShack Third Quarter 2011 Investor Conference Call and webcast. We're pleased to provide an update on our results and outlook today. With me is Jim Gooch, President and Chief Executive Officer and Dorvin Lively, Executive Vice President, Chief Financial Officer and Chief Administrative Officer.
Before I pass the call to Jim, I'd like to take care of a few housekeeping items. We issued two announcements this afternoon, first was our release announcing a new capital allocation action taken by our Board of Directors that includes an increase in the annual dividend and a new $200 million authorization for share repurchases. The second was our earnings release for the third quarter. We also filed our 10-Q with the SEC. These announcements and the 10-Q filing, along with a replay of this webcast, are available on our IR site.
One note regarding one-time charges in the quarter, as we discussed last quarter we took a 23.4 million or 14.5 million after tax, $0.15 per share charge awaited to our wireless carrier transition during the quarter. The charge was recognized in SG&A. We also recognized two smaller one-time first cost of 800,000 related to our manufacturing plant closure and a 400,000 inventory valuation adjustment related T-Mobile inventory. A detailed reconciliation of one-time items in the third quarter and year-to-date period is included 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 question and answer session. These statements are based on our belief and expectation and are subject to certain risk and uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC and such as our most recent Form 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 this call. Do feel free to re-queue to ask additional questions.
With that, let me turn the call over to Jim Gooch.
Thank you, Molly, and good afternoon, everybody, thanks for joining our call today. I think before we begin discussing what happened in the quarter, as I’d like to take a second and tell you how pleased I am to have Dorvin on the team. Dorvin joins us as our new CFO and CAO. He joined the company in mid-August. He is overseeing all the finance, supply chain, dealer franchise and real estate. He brings with him about 30 years of experience in retail and consumer products, most recently CFO at Ace Hardware, before that at Maidenform Brands. He is going to be taking active role in the Investor Relations programs. So, I expect everyone is going to have an opportunity to speak more with him very soon.
Now, with that I’ll take a look at the quarter. I think as you can see from our earnings release today, the third quarter continued to be a challenging, continued to be a transitional period for us particularly in the mobility platform which included our carrier transition, shifts in the product launch timing and changes in the carrier plan and policy. So, well, we saw the mobility platform sales improved from the third quarter -- from the second quarter to third quarter, we didn’t see the strong growth trend that we saw in last year’s third quarter results.
I describe our shift to a broader more compelling wireless portfolio. It’s definitely still a work in progress I think both because of the carrier transitional issues as well as a continued difficult trend out in the economy. But without question the addition of Verizon to our assortment and it puts us today in a much stronger spot with our wireless business and probably we’ve ever have been in the past and today we’re ideally positioned to capitalize in our opportunity in the mobility business one with all the top carriers with the top handsets and with the best prices in the industry.
Equally important, we now have a strategy for navigating through our challenges, the strategy that over the next year or so will migrate as to better balance wireless portfolio across leading three carriers. The Mobility platform it continues to be our growth platform one that supported by our convenience small story high touch, high service model. And we are focusing significant attention on maximizing that opportunity in order to smooth out in order to balance our overall portfolio performance.
I think its worth noting that we had 36% growth in Mobility last year and we accomplished those results without having the largest wireless carrier in our stores. So now with the addition of rising we are clearly better positioned for growth in the quarters ahead.
As far as the other businesses looking at the quarter our Signature business showed improvements across many categories in headphones and tablet accessories special purpose general purpose batteries and tactical products. You see our improved assortment improved in store presentation and execution in these categories. These were all substantial improvements for and trend versus prior quarters.
Although these bright spots were unfortunately masked primarily by the declines that we saw in the wireless accessories which tracked with a weaker Mobility sales and then some still some negative year-over-year impact from the converter-box sales. Our CE business continued product cycle declines in line with the industry turns and categories where we offer those products. We continue to de-risk our approach and CE to ensure we maximize our performance and limit any inventory risk.
We’ll continue to be opportunistic in these categories we are looking to drive traffic and when possible improving volume and improving price reception. Now couple of comments on Target and Mexico company operator stores first take and look at Target we successfully completed the far rollout of the remaining locations in the third quarter ending the quarter with 1490 centers. The business continues to mature it continues to show improvement with growing sales per door and improving SG&A margin.
We continue to work closely with Target to raise guest awareness through promotions and through exclusive offerings. Our postpaid wireless product are now our regular part of their national circular with combined when you combined that with our strong customer service is resulting an increased traffic and increased sales.
Taking a look at Mexico our business continues to improve there continues to grow in the third quarter of Mexico stores delivered positive mid teen same-store sales with solid gross margins and improved SG&A. Our initial store growth projections from Mexico have been delayed this year. Our original plan was to open about 40 new stores this year and now I would estimate the number to be closer to 20 just to, just some delays and finalizing some of the store leases. But we still believe the Mexico can support significant store growth and anticipate the store count doubling over the next three to four years.
Before I pass the call over for Dorvin and he is going to go into deeper review of what happened in the third quarter. I’d like to comment on the actions taken by our Board related to the capital allocation.
Our management in the board we’ve undertaken a number of initiatives in the past six months and we’re on those so we’re conducting assessment of our use of cash. We looked at peers, we looked at near and long-term opportunities to deploy capital. We looked at our substantial liquidity. Our leverage we looked at our continued strong cash flow and our decision to double the dividend and institute a sizable share repurchase program reflect both the capital review and our assessment of the current economic environment.
Our strong liquidity position in cash flow provide the flexibility to pursue both internal and external growth opportunities while still allocating some of our excess capital to shareholders.
We continue to believe that our shares are under value, but also continue to expect volatility in the market and as a result of all these factors we’ve decided that now it’s a right time to provide a more consistent return of cash to shareholders via both the increased dividend and the share repurchases.
So, with that let me turn the call over to Dorvin. He is going to provide you with a more detailed review of what happened in the third quarter.
Thanks Jim. Good morning everyone. I’m delighted to speak with you today and excited to be here at RadioShack. Before I review the quarter, I’d like to share some thoughts on why I’m glad to be part of the team. For me the appeal is largely focused on the strong brand, a healthy balance sheet and the substantial cash flow generation of the company. So, while clearly we are facing challenges both in the consumer environment and via some of the transitions as Jim mentioned taking place in our Mobility business, this is a company making important changes on the product side as well as the balance sheet side to deliver value to shareholders.
So, now let me walk through some details on the third quarter results. I’ll start with our sales performance in the quarter and I’ll discuss these by the three platforms Mobility first, then Signature and then our CE platform.
Consolidated sales were up 3% driven by the growth in our Target Mobile centers. Our company operated segment declined 5% in the quarter as we experienced sales declines in both the CE platform and Signature platform. I’ll describe those a little bit more in a moment, but first let me give you more details on the Mobility platform which includes our postpaid and prepaid wireless business, along with Tablets, eReaders, and no-contract airtime.
Mobility sales were up 1.3% in the quarter showing improved growth from the second quarter, but slower growth than we experienced in the third quarter last year. Year-to-date this platform is up 1.6%. Several factors impacted the Mobility sales. First, we saw a dramatic decline in the T-Mobile sales as we exited this business throughout the quarter and made the decision to not replenish inventory. Our efforts to manage our T-Mobile inventory down were successful and minimized our inventory risk. However this did have a negative short term impacts on the business.
With that said our Verizon launch in mid September well operationally flawless was somewhat softer than we planned. Our product assortment was strong with a line up of the best selling handsets available and it continues to get stronger as new handsets are introduced this month as well as going forward.
Our customer promotion at launch was also strong. However we realize that it would take time to develop the Verizon business. Consumer awareness is not what we wanted to be at, but now with the number one wireless carrier in the industry we are well positioned. While wireless is nearly a $2 billion business for us, we recognize that consumer awareness around mobility at the Shack remains a challenge and that’s a tremendous opportunity for us as well.
In order to help accelerate awareness specifically around Verizon, we are both increasing the percentage of our current marketing budget allocated to Verizon something, which we already had in our plans for the holiday and better focusing our spin around media, that has proven to be most effective in driving awareness and then ultimately sales.
Specifically we’ve seen some very positive results from our social and digital media initiatives and will leverage these assets in Q4 and beyond to accelerate our plan with Verizon. We’ve also launched our first TV spots featuring Verizon during holiday and we believe that the combination of the strong media buy combined with compelling devices at great values will be a positive impact on our business.
Now let me talk about Sprint for moment. Sprint is our longest and most well developed postpaid carrier relationship. When we spoke last quarter, we described some of the changes that Sprint had put into place for their customers. Specifically an alternative solution to the early upgrade program that was introduced in April and that would reduce some customers ability for an early upgrade.
In the first half of the quarter, our Sprint business had returned to strong positive year-over-year trends. During that time, the Sprint business was supported by an aggressive promotion on the EVO handset. In mid-August the Sprint business declined. We saw several factors that play here; one the EVO handset promo and product ability ended. The follow-on EVO 3D handset did not have the stronger consumer appeal. The pace of the early upgrades declined, we’ve again to see changes in Sprint’s credit model and then there were the rumors of the new iPhone and the availability of the iPhone on the Sprint network which looked to slowdown consumer decisions pending more information on this availability.
Sprint continues to make changes to their customer model including further changes to the early upgrades that began this month. We continue to monitor some of the things that Sprint is doing with their model and we work to continue to drive the overall Sprint business. We expect these changes to continue to impact our Sprint our sales over the next couple of quarters, as we cycle through these changes that began back in April.
So what does this leave us today with their Mobility platform? The state of the Mobility business is still in transition as Jim mentioned. The things we feel good about though are that we have the top three carriers for the first time. We have a strong assortment of handsets from each of these carriers. In addition we are making great progress and expanding our overall Mobility solution offers through additional accessories and services and we’re continuing to improve our in-store experience with better tools and training for associates.
Also, as Jim mentioned as the Verizon business grows and AT&T continues to mature, we expect to develop a strong more well balanced Mobility platform with less dependence on a single carrier all of this leading to more predictable results from this platform.
Next let’s talk about the Signature platform which includes our accessories, power, service and technical. In general, these categories are high margin low turn that require minimal working capital investment to maintain. These categories are mature, but remain a key driver for profits, for our customer traffic and loyalty to our company. In the third quarter, the Signature platform was down 6.3% on a reported basis and when you back out the impact of the converter boxes down about 4.4%. Year-to-date the platform is down 6.1% and then adjusted for the converter boxes down 4.1%.
We continue to stabilize the performance of many of these categories and we look to improve the platform sales trend in the fourth quarter. With slower growth in the postpaid wireless sales, we saw our wireless accessories business turn negative in the quarter. While the platform overall results were down, we did see several bright spots within the platform. Our power products both general purpose and special purpose batteries were up in the quarter; headphones were strongly positive; also tools, components and hobby products also were benefiting from the focus we placed recently on these categories in our Great Create marketing campaign.
This category also benefited from higher incremental tablet accessory sales. Going forward you’ll see continue to invest in the platform with a goal of offering consumers a full solution in connecting both their Mobility and CE products. We will continue to focus on managing declining categories and investing in growing categories such as headphones, digital cables, wireless cases and tablet accessories.
Investment will come in the form of improved in-store fixtures, targeted marketing and increased investment in expanding these assortments. Many of these initiatives in fact have just begun.
Okay, moving on to our CE platform. This platform continues to be impacted by the overall difficult CE industry trends and our results were largely consistent with those trends for the specific categories that we offer.
The platform was down 20.9% in the quarter and 17.4% on a year-to-date basis. As a remainder this platform makes up about 20% of our revenues, but carries a gross margin rate that’s well below our company average and then this represents less than 10% of overall gross profit dollars.
These are largely mature often declining categories that we’ll manage opportunistically and maximize profit while reducing our inventory risks. We expect the CE platform sales to continue to decline in Q4, but still see openings to participate opportunistically will select products and promotions. We are taking no substantial inventory risk in this category and we look to optimize the assortment and use these categories to drive traffic and where possible improve the brand and price perception.
However it’s important again to note here that unlike many other CE retailers these categories do not significantly drive our overall economics. Before moving further down the income statement I’d like to make a few comments on some of our key merchandising initiatives, particularly related to the Mobility and the Signature platforms. We continue to focus on building profitable baskets and driving top-line growth through the attachment of accessories and services. This is all about giving our associates the right products at the right time to attach.
We continue to expand our accessory assortments as planned, making sure that we do have the right accessories for these key end products. As part of this we’re offering more compelling product bundle offers to help our associates attach multiple accessories with these end products.
Now let’s talk about gross profit. For the third quarter gross profit was $442 million at a margin rate of 42.8% when you exclude the one-time items. Year-to-date our gross profit is $1.33 billion or a gross margin of 44.5% again excluding the one-time items. The third quarter gross margin decline was primarily driven by the overall growth of the Mobility platform through the Target Mobile centers and our U.S. RadioShack company operated stores combined with a change in the sales mix within the Mobility platform.
Our Target Mobile revenues are made up predominantly postpaid wireless products, so these revenues generally do not include accessories. And as Jim mentioned earlier we’ve seen a very rapid expansion of the Target Mobile locations and the revenues associated with these mobile centers has increased more than 10 times in the current quarter compared to the year ago period. Similar to our corporate stores, the Mobility revenues at Target delivered gross margin that’s, it’s lower than our company average, but while this gross margin, it’s certainly high in terms of CE terms, but the rate is below the overall RadioShack corporate average. This higher Mobility mix in our revenues from both the growth in our U.S. RadioShack company operate stores and from the Target Mobile centers largely explains the decline in the gross margins in the third quarter.
And within this Mobility platform, the gross margin reflect several factors, first promotional activity as we put into place initiatives to exit the T-Mobile business to manage our overall inventory risk down. And then with the Verizon launch and the promotional activity associated with this very important launch. And then finally some Sprint product promotions that we discussed earlier and as we have explained in some past quarters the shift in the revenues towards certain lower margin mobile devices including tablets also impacted the gross margin.
Moving to SG&A expenses, our SG&A in the third quarter increased to 388 million excluding some one-time items. As previously disclosed, we recognized to final one-time charge related to the carrier transition of $23.4 million in the quarter. The year-over-year increase in SG&A expenses in the quarter excluding these items reflects higher cost to support the expansion of the Target, the Target Mobile centers I had mentioned. And looking at our core business SG&A excluding Target Mobile cost and the one-time training cost associated with the Verizon launch, our SG&A in our core business was up about 1%. So we continue to manage this effectively.
Couple of other notes on SG&A, we continue to realize lower rent and occupancy cost in the quarter and we also shifted some of our advertising spend from the year to support the Verizon rollout. But we will still be within our guidance – our prior guidance on our annual advertising spend. Looking at the sequential increase in SG&A we also made some investments in improving our overall store appearance in some of our higher volume stores this past quarter.
Okay, let’s talk about the balance sheet for a second. We ended the quarter with cash balance of $668 million and our inventories stood at $790 million at the end of the quarter, this was up about $32 million or 4% from last year and this reflects the investment we made in our wireless inventory to support both the launch of Verizon as well as the rollout of additional Target Mobile centers, so we’re managing and then finally we managed our inventory risk on T-Mobile that I referred to earlier.
Our increase in inventory of $32 million compares – when you compare to the increase in our accounts payable of $26 million indicates the overall freshness of our inventories at the end of the quarter. Our strong operating cash flow has generated free cash of $200 million so far this year, that’s up a $110 million at this point from last year. As noted in our press release today we adjusted our expectation for capital spending this year to a range of $85 million to $110 million and this was from previous range of a $100 million to $125 million.
Our balance sheet and cash flows also reflect improvements in our collections and our overall management of accounts receivable. The fact that on a total company, our Mobility platform was up and we managed our accounts receivable down by 4.4% points to this improvement.
Now let me share with you how we see the fourth quarter shaping up. First we see a challenging economy and pressure on consumer spending continuing. While we see an improvement in the earnings trend in the fourth quarter compared to the current quarter we still expect the fourth quarter earnings to be down compared to last year.
Trend improvements are expected as consumer awareness of our Verizon wireless offerings grow as we participate in the new smartphone launch and improve our Signature platform results. At the same time, the fourth quarter will be impacted by seasonality were typically a larger portion of sales are driven by traditional CE and products, which tend to push gross margin down in Q4 versus Q3 or other less seasonal periods.
Sprint will also continue to work on resolving its own issues. And we expect it will take a few more quarters for things to settle out there. And its choices will impact our offerings and traffic making it difficult to plan at this time. If Sprint business is softer than expected then our results could be further impacted.
And with Verizon, we’re at the beginning stages of a process of growing the consumer awareness and a building momentum and recognition of RadioShack, as a provider of Verizon products. We anticipate this process will continue into 2012. We’ll provide further color on our 2012 outlook when we complete our full planning process for this year, and we’ll speak to you in February.
That concludes my remarks. So now I’ll pass it back to Jim.
Thank you, Dorvin. Just a few concluding remarks and then we’ll move on to your questions. First up, we’re continuing to work to balance shareholder returns for the company’s growth objectives. I think specifically being addressed with the new capital allocation plan. We’re using our excess cash to significantly increase our annual dividend and returning further value to all shareholders through the $200 million authorization for share repurchases. At the same time, we are extremely focused on improving our offerings, the awareness of these offerings and the quality of the service as we provide.
As I’ve said earlier our shift to our broader and more compelling wireless portfolio is still a work in progress, but we certainly feel good about the steps that we’ve taken with now the top three carriers available in all of our company owned stores and how this adds to our ability to grow and to our ability to improve our position as a multi-carrier wireless retailer.
In Mobility we continue to invest in driving awareness, continue to invest in driving consideration allocating more of our overall advertising dollars to wireless and particularly focus on raising consumer awareness of Verizon and our overall offers.
You are also going to see us continue to be a price leader across the board for all of our wireless products. I think certainly we face some short terms on transitional issues, but the addition of Verizon without question strengthens our overall position today and significantly improves our ability to grow going forward.
From an operational standpoint we did a great job of transitioning T-Mobile out and Verizon in and our goal now is to capitalize on our operational strengths and focus on driving consumer awareness of our wireless products, of our improved wireless assortment and this really represents a whole new ball game for us, this represents a whole new opportunity for us, going forward.
So in conclusion maximizing our new partnership with Verizon, growing our Mobility business through all three carriers, driving attach and improving our trend in the Signature platform, they all remain real opportunities for us and the entire team is extremely focused on these priorities heading into the fourth quarter and heading into 2012.
So now with that I’d like to open up the call for questions. Operator, we now like to take some questions. Thank you.
Yes sir. (Operator Instructions) And the first question comes from the line of Matthew Fassler with Goldman Sachs. Please proceed.
Matthew Fassler – Goldman Sachs
Thanks a lot. One question and one follow-up, first on the question, your decision to raise your dividend, while it seems like a smart decision from the capital allocation perspective raises your commitments to shareholders in the time when the earnings seem to be a much less certain then it takes the payout ratio to a pretty high level. So, how do you all essentially think about the security of the dividend and your financial flexibility at a time when there is an accurate visibility in the business?
I think Matt, and we’ve talked about this before. We’ve gone back and forth looking at dividend, looking at share repurchase, looking at internal external growth opportunities and how we’re going to utilize our capital. I think we’re – we feel that’s a significant increase without question doubling the dividend, providing some great return to shareholders. If you look at our cash flow and even though we’re in a transitional state from an operational performance, we still feel very strong about our cash flow. I think that’s evidence over those past nine months of generating over $200 million of cash flow even as our some of the operational performance as been a little bit challenged.
Matthew Fassler – Goldman Sachs
Got it. And then secondly, you didn’t discuss the iPhone at all and obviously the –waiting for the iPhone moment think what has impacted wireless trends across your brands. And also the iPhone launch in a couple of weeks back, I would think would have some impact on the business. So, can you talk about the impact that you think could have on the broader wireless business not just for Sprint in the third quarter and how it started out carrying Q4?
Well, that the launch actually occurred in Q4, so it didn’t have any impact on the third quarter from positive standpoint. You’re absolutely right; I think we did see some people delay, we think the biggest delay might have come in the Sprint business since there was new into the Sprint family. It’s hard to tell what impact it had on the Verizon business since the Verizon business was new for us. So we didn’t have a great comparison.
And then the AT&T business and we’ve seen that with prior launches with Verizon launch in the iPhone and with different devices being launched on Sprint. Our AT&T business is continued to trade pretty solid through all these times now. We had a pretty successful launch, I think successful across certainly AT&T which was a more established and a better consumer awareness on that brand, probably opportunities a little bit more on the Sprint business and Verizon business for the raising awareness that were in that business. So, I think more opportunities to come across all three businesses but, very solid continued performance I would say on the AT&T business.
And the next question comes from the line Chris Horvers with JPMorgan. Please proceed.
Chris Horvers – JPMorgan
Thanks and good evening. Trying to untangle the different pieces of the revenue story, can you talk about specifically how much T-Mobile is down year-over-year and maybe give us some, a forward view about how we think about that had impacts to business on a go forward basis? And then as a part of that, can you also quantify perhaps how much the converter-box impact was just total sales year-over-year?
And just to converter-box you can probably go back through the Qs and see the impact there and I’d tell you that right now we’re selling very little. So you can see what the prior year numbers, where I don’t have those in front of me but you can get a sense of those. We don’t generally go through the individual carriers but what I can tell you is Dorvin mentioned we’re very successful in transitioning out of this, if nothing else you can see but we had no additional inventory write-off in the third quarter from the T-Mobile business. We made the decision that we weren’t going to replenish back to the T-Mobile business so the last several weeks in T-Mobile on a year-over-year basis saw a substantial decline as our inventory levels were very low.
We launched a Verizon business very happy again executionally and on how that launched but from numbers perspective off to a slightly slower start than what we had hoped although still feel very excited again about the position that we’re in, I’m very excited about those growth opportunities going forward. I’d tell you as you look at the fourth quarter as you look at the first quarter if you want to get a sense as to how you should fit those in.
We gave a little bit of an idea from a profitability perspective of we anticipate the trend improving although compared to last year it’s going to continue to be challenged. That’s from an earnings perspective, I think the sales we’d also anticipate the trends improving and we should see improved sales on a year-over-year basis as both Verizon and hopefully Sprint improves in the quarters to come.
Chris Horvers – JPMorgan
So, I think just like ballpark, the T-Mobile like is it, do you think it stood at 3 points, is it of sales or because are you going to have this repeating for the next few quarters just trying to right size the sales?
Now, your comparison will be Verizon versus T-Mobile and we certainly anticipate Verizon outperforming what we did in prior years in the T-Mobile business.
Chris Horvers – JPMorgan
Okay. And then also on the gross margin side trying to pull that apart a little bit as well, how much of that was Target specifically is it – should we think about Target seen in the difference between five three less store comp versus I guess the minus four total comp, is that 1.3 essentially the size of the Verizon business. And then are we talking, if traditional fee Best Buy is at 22% gross margin is it north of that, but less than the 42 for the house?
Well, I think we gave most the color that we’re going to give on the individual pieces. What I can tell you is, we’re up against several factors and we had the Target piece and we had the very promotional, heavy promotional activity in the wireless, in the Mobility platform not only with Sprint and EVO and the EVO 2, but also leading into moving out the T-Mobile business and launching of the Verizon business. We’re very aggressive in the first two weeks from a promotional perspective on the Verizon business. So all of those factors I think were negatively impacting gross margin rate on a year-over-year in the third quarter.
And the next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please proceed.
Hi Scot, how are you?
Patrick Palfrey – RBC Capital Markets
Hi, how are you doing, this is actually Patrick Palfrey sitting in for Scot. Thank you for taking my questions. I guess just continue on the gross margins, last quarter you’d mentioned that company on stores anniversary were relatively flat and I know T-Mobile and Sprint is hurting a little bit. But, could you just speak a little bit more toward what you’re seeing at the company on stores as you anniversary those lower margin handset introductions?
Yeah I think as we anniversaried some of those lower margin handset, we thought we would be through some of the more challenging year-over-year comparisons on a margin rate now unfortunately some of these additional things from the promotional impact of a very successful sell through on the old EVO on Sprint, launching of the new EVO 2 and T-Mobile, winding down that business, that’s a one time transitional issue and then launching we probably went out a little bit more aggressively on the Verizon launch from a promotional perspective than what I had anticipated for the last time we talked. So all of those would be third quarter impacts, and now what we’re going to have going forward with the launching of the iPhone across all three carriers certainly on the Sprint and on the Verizon business, you’ll have some year-over-year impact with - as that business rolls out over the next few quarters.
You shouldn’t see the impact continue on the AT&T, but we will probably continue now to have some margin pressure across the business here for the next few quarters as we grow again some of these lower margin handsets across the other carriers.
Patrick Palfrey – RBC Capital Markets
Thanks guys. One more question if I may, I guess with Verizon, you only got to move your carrier offerings, are you seeing an uptick in people coming in and looking out let’s say Sprint or AT&T and then perhaps choosing to go with Verizon or vice versa?
We’re trying to get out some of that. We have customer counters in our stores, but we don’t necessarily have intended traffic, so we can see the added traffic coming in with Verizon coming in from a wireless perspective, but we don’t know that intended traffic, we are in the process right now of doing some customer intercepts, so we understand intended traffic versus what they ended up transacting as well, so we hopefully will have some of that information probably the next time we speak.
And the next question comes from the line of Greg Milech with ISI. Please proceed.
Greg Milech – ISI
Hi, great, two questions, one on the traffic and also capital allocation, Jim you mentioned you didn’t have traffic per se but transition count, could you help us there what was transition count down more than the comp or ASP help you a little bit in the quarter, how did that play-out?
Generally, we don’t go through the specifics but I’ll tell you that the addition of Verizon without question is adding traffic in the addition of Verizon also helps with what the ASP now that’s being offset by some of the challenges with walking away from the T-Mobile business, the delays on the iPhone, some of the back half business performance on Sprint, but certainly we’d think going forward Verizon is going to help both on the AT&T and on our traffic count.
Greg Milech – ISI
Got it. And on the capital allocation, do we have a better sense now if we see the inventory at the end of this quarter is that the working capital build that you – is that done for Verizon so to speak or check and tune to trend up and also what cash do you need to run the business?
Yeah, I think from a Verizon and from a target – that the target was a large impact to our working capital. Verizon, we had launched and had pretty solid inventory at the end of the third quarter with the exception of the iPhone business in both Sprint and Verizon. So none of the new and overall none of the new 4S inventory came in until October. So, there will be some additions there but it will also probably be replacing some of the existing wireless inventory.
And the next question comes from the line of Dan Wewer, Raymond James. Please proceed.
Dan Wewer – Raymond James
Thanks. Jim, I want to clarify the comment you made about Sprint business. So in the third quarter you believe that Sprint customers are probably sitting on their hands waiting for the iPhone launch and it was probably more vulnerable than the other two carriers. That’s in up you suggested that Sprint is getting off to a slower start during the fourth quarter. So I am curious what did those customers who are waiting for the iPhone to launch what do they end up buying their iPhones, is it RadioShack or is it one of the other competitors?
Well and let me try to be clear. I think from a relative trend and a year-over-year basis, I think Sprint had more of a probably a negative impact. And as I said on Verizon it was tough for us to see what that impact was because that business was new. And then our AT&T business with iPhone I think continues to mature and so even through this transition just like when Verizon started to carry the iPhone. We’ve been able to still maintain a fairly solid business on the AT&T side.
Now we are off to a slow start in the Sprint business just like in the back-half of the third quarter. We did have some inventory challenges with Sprint with getting in the iPhone, we now have the iPhones arriving in our store. But off to a slower start than what we’d hoped I think we’re better prepared with the Verizon business and the AT&T business.
Dan Wewer – Raymond James
Do you think this reflex just the growing level of competition from Best Buy Mobility as well as other discount stores with their expanded wireless department and that’s making it difficult for RadioShack to get the visibility with their customers on Verizon, there is just so much competition, so much noise in the marketplace?
There is certainly a lot of noise out in the marketplace from overall wireless. But I think that’s a challenge for us with our overall wireless business that we still don’t have the consumer awareness of where we’d like it to be. Now we look at it that’s still an opportunity, because we’ve been able to do the business 36% up last year without the awareness. And so as we build this awareness and it’s not going to come overnight, it was only a couple of weeks in the quarter. It’s not going to come overnight that customers’ all of sudden understand that we’re in the Verizon business.
Now having said that without question it’s a very competitive environment out there, but we continue to look at it how we’re competing against some of I’d say the Best Buy mobile locations and we just still think our guys out in the stores are doing a great job with all the new competition coming into place. And we still think now position with Verizon is part of our mix that our growth opportunities going forward, the best they’ve ever been.
And the next question comes from the line of Michael Lasser with UBS. Please proceed.
Michael Lasser – UBS
Good evening, thanks a lot for taking my question. Are there opportunities to reduce the cost structure over the long-term? And I asked because it seems like as more of the business is driven by the Mobility categories, the gross margins going to be here towards margin on the category, which I think is in the mid-to-high 30% range. So with the SG&A as a percentage of sales not much sales of that it could change the margin structure of the business over the longer-term?
It could and I think that there is always opportunity to cut expenses if we want to aggressively go down that path. I think what we’ve been trying to do over the last year or two was more investment in the business that drive top-line growth. And I think with Verizon coming in, I think you’ll continue to see us do that, I wouldn’t anticipate any significant large cost reductions in the short term, I think one thing we’ve proven here since – since I’ve been here over the last five years is an ability to manage at SG&A line. And if we need to aggressively going after reducing that, but right now we’re very focused on what’s going to happen with Verizon coming in, what’s going to happen with the three type carriers that we’re now carrying trying to raise consumer awareness and trying to jive top-line growth.
Michael Lasser – UBS
Okay, thank you. And my follow-up question is on the tax release for Verizon versus the other carriers that you have, is that an opportunity it seems like there is demographic profile for Verizon customers probably a little more attractive than in some – in perhaps T-Mobile?
I think we’re very opportunistic about what that Verizon customer would bring from a market basket. And as you look at the performance of the business with the struggles in the back-half with Sprint and then the transition between T-Mobile and Verizon and also the struggles that we had with the wireless accessories. I think an improvement of what the Verizon business as that business matures and improvement what the Sprint business continued strong performance with AT&T. All of those are only going to end up really helping to turnaround the trend in that wireless accessory business.
And the next question comes from the line of David Schick with Stifel Nicolaus. Please proceed.
David Schick – Stifel Nicolaus
Hi good afternoon.
David Schick – Stifel Nicolaus
I guess there is a good follow-up to Michael’s question, if sort of thinking longer term right now there is the noise of adding Verizon in the cost they are in, the gross that target and that mixing in and then your decision to shrink CE as a kind of plus the weakness there, but your op margins ‘07 to 2010 were really pretty steady. When we get passed all of those things as you see the structure of this business, does it look like that ’07 to 2010 op margin better or worse, any thoughts on just the structure, what the operating margin should look like?
Well, I think you can definitely drill back to there, we’re certainly starting at probably a lower point at this point and we’re going to have some continued transitional issues probably in the fourth quarter into the first quarter. I think as I look forward into next year and start looking at second third and fourth quarter I think that’s when you’ll really see us have opportunities, I think to build that closer to those numbers.
David Schick – Stifel Nicolaus
Okay, great. Thanks.
And the next question comes from the line of Alan Rifkin with Barclays. Please proceed.
Alan Rifkin – Barclays
Thank you. Couple of questions if I may. Could you please quantify the trading expenses that were incurred in Q3 and what is your prognosis for continued expenses along that line item in Q4?
I don’t think we’ll quantify the exact amount, but I’ll tell you that we were able to roll-out Verizon, able to continue with their training expense and still have it be inline with prior quarters and prior years; I would not call it a significant dollar increase year-over-year or quarter-over-quarter.
Alan Rifkin – Barclays
Okay. Second question if I may Jim concerns the capital allocation plan so basically the increase in the dividend amounts to the amount more or less the $25 million that you have just reduced CapEx by for this year. Wondering if going forward number one you think CapEx will continue to be suppressed a little bit and an ability to continue to pay the dividend. And then secondly and more theoretically as a follow-up to Matt’s question, just kind of curious as to the timing that you guys were choose to raise the dividend when admittedly, you said Mobility is in transition, Sprint is under pressure, the Verizon launch has been soft and you are still anticipating a pretty long transitional period in here. You maybe just talk to the timing of announcing this plan today as supposed to maybe waiting for greater stabilizations in the business?
Sure. Well, I guess first on the first question, the increased dividend has absolutely nothing to do with the any change in our capital spending. The reduction in the capital spending had to do in and partly because of the reduction of the new store count in Mexico as well as (indiscernible) other items that either came in under original budget plans with either changed delayed or terminated. But it wasn’t a concerted effort to reduce capital because of necessarily anything going on with the business or anything going on with cash flow. In fact, if you look at the cash flow, the first nine months of this year versus last year, it’s actually much stronger year-over-year.
Now the decision again to why we went out at this point was, we looked at our balance sheet, we looked at the cash that we are sitting on the balance sheet, we looked at even in this challenging times of over the last few quarters. Our ability to continue to generate positive cash flow and thought that now was the right time to return what view as some of this excess cash to shareholders and we felt the best way to do that was in combination of both the share repurchase and the dividend.
Ladies and gentlemen, this concludes the question-and-answer session for today’s call. I’d now like to hand the call over to Mr. Jim Gooch for closing remarks.
I like to thank everyone for your participation today. I think if anybody has any follow-up questions please reach out to Molly, she will be available for everybody. So thank you again. Good bye.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!