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RadioShack Corporation (NYSE:RSH)

Q4 2011 Earnings Call

February 21, 2012 8:30 am ET

Executives

James Gooch – President, Chief Executive Officer

Dorvin Lively – Executive Vice President, Chief Financial Officer

Molly Salky – Vice President, Investor Relations

Analysts

Matthew Fassler – Goldman Sachs

Dan Wewer – Raymond James

Patrick Palfrey – RBC Capital Markets

William Reuter – Bank of America Merrill Lynch

Chris Lang – UBS

Oliver Liao – ISI Group

Seth Sigman – Credit Suisse

Shaun Kolnick – Morgan Stanley

Brad Thomas – Keybanc Capital Markets

Anthony Chukumba – BB&T Capital Markets

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2011 RadioShack Corporation Earnings conference call. My name is Fab and I’ll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Molly Salky, Vice President, Investor Relations. Please proceed.

Molly Salky

Good morning everyone and welcome to the RadioShack Fourth Quarter and Full-Year 2011 Investor Conference Call and Webcast. With me on the call today are Jim Gooch, President and Chief Executive Officer; and Dorvin Lively, our Executive Vice President, Chief Financial Officer and Chief Administrative Officer.

We filed our 10-K with the SEC earlier today. Our earnings release and the 10-K filing, along with a replay of this webcast are available on our IR site. Also note that we’ve provided a reconciliation of GAAP versus non-GAAP financial measures on Page 9 of our earnings announcement.

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 would include words like expect, believe, anticipate, or words with similar meaning that are based on our beliefs and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from our forward-looking statements about those results. These risks are detailed in our various filings with the SEC, such as our most recent Form 10-K, as well as our news releases and other communications. The Company does not undertake to update or revise any forward-looking statements which speak only as of the time they are made.

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

With that, let me turn the call over to Jim Gooch, RadioShack’s President and CEO.

James Gooch

Thank you, Molly, and good morning everybody. Thank you for joining our call today. We knew that the fourth quarter was going to be challenging. Unfortunately, the results were below our expectations. Let me go through a few of the factors that impacted us during the quarter.

First, Sprint’s underperformance – Sprint’s changes in their customer and credit models continued to impact our mobility sales and gross profits in the quarter. We’ve discussed in prior quarters Sprint’s customer model changes beginning in second quarter. This continued us to impact us in the third but we expected an improvement in trend going into the fourth quarter. In fact, the trend worsened as tightening of the credit model combined with their early upgrade change to further deteriorate our trend.

Second, several factors negatively impacted our mobility platform gross margin rate: a higher mix of lower margin Smartphones that was the most significant; the expansion of iPhone into three carriers combined with the launch of iPhone 4S resulted in a dramatic increase in the mix of iPhone sales. This helped to drive our positive comp store sales but negatively impacted our margin mix.

Next, the higher overall percentage of mobility revenues – this mix shift was driven by both the expansion of Target Mobile Centers and the growth of mobility in sales in our Company-operated stores. This shift puts pressure on our overall gross margin rate as mobility margins have historically been below the Company’s average rate.

And finally, the quarter and holiday season was highly promotional and highly competitive, certainly more promotional activity than we expected, and this also impacted margins across all platforms.

Now I’d like to provide some context on the impact of the Sprint changes. Sprint’s been our longest, our most mature, and our largest post-paid carrier relationship. Our growth in Sprint was a significant driver of our mobility platform growth in 2009 and ’10, becoming the majority of our mobility platform sales in 2010. With this large position, their model changes resulted in meaningful impacts to both our mobility and overall results. We continue to work closely with Sprint to improve our business, with both of us very committed to long-term profitable growth.

Our results also reflect our ongoing efforts to maximize opportunity in our mobility business, particularly now that we can offer the top national wireless carriers offering their best handsets and the best prices in the industry. Without question, with the addition of Verizon, our position in mobility today is stronger than it ever has been. The mobility platform continues to be our growth platform, one that is supported by our convenient high-touch, high service store model, and we’re focused on maximizing this opportunity moving forward.

We made progress in the fourth quarter on several key initiatives, and outside of our Sprint performance we feel good about the strength of our overall business. Within mobility, the launch of Verizon provided incremental sales, we realized significant increases in our AT&T business driven by both iPhone but also other post-paid wireless handsets, and sales of tablets and e-readers were strong and they drove meaningful incremental sales as we expanded our assortment, we enhanced our in-store merchandising, and featured prominently in our marketing and our advertising campaigns.

Within signature, the investments we made were productive. We delivered sales improvements in headphones and tablet accessories, wireless accessories, warranty, and in technical products. These were all substantial improvements in trends and are the result of our improved assortment, improved in-store presentation, and improved execution.

Do the winners completely offset the losers in this platform? No, not yet; but the trend improvement shows us that our efforts are moving us in the right direction.

Our CE platform performance reflects continued product cycle declines and technology convergence on the mobile devices. As we’ve said before, our strategy here is to continue to de-risk our approach on traditional CE to ensure we maximize our performance and limit inventory risk. We’ll continue to use these categories opportunistically, driving traffic and when possible improving brand and improving price perception.

Before I move onto our outlook, I’ll add a few comments on our Target business. We’ve acknowledged in the past that Target has gotten off to a slower start than we had originally planned. 2011 was definitely a challenging year for this business, particularly on the operational side with opening 650 new centers, closing 400 of the Sam’s kiosks, building and staffing the infrastructure to support what’s now nearly 1,500 locations, all while focusing on raising consumer awareness. The entire team is very committed to improving trends in 2012 with an emphasis on driving productivity per store, continuing to raise consumer awareness, and improving inventory management.

So overall, where does this leave us for 2012? We expect our results will continue to be impacted by factors evident in our fourth quarter, including the higher mix of lower margin Smartphones, particularly iPhone, and the continued shift in total revenues to our higher mix of mobility. That said, we feel good about the progress we made on initiatives in 2011. Our plan this year is to continue to build on this progress, focusing on key initiatives including growing our mobility business, making further enhancements to our store experience, and optimizing our merchandising and our pricing strategy.

We expect the Verizon business to continue to mature throughout the year as we continue to raise awareness with our customers. AT&T is also expected to grow and should deliver another solid performance this year. This will create a far more balanced, more stable and predictable foundation for our mobility business. Our iPhone mix will likely normalize as we move through the year, although new devices both in handsets and in tablets could create peaks and valleys in volume and impact mix.

These trends shape our outlook for 2012 and our capital allocation decisions in the near term. When we saw changes in the Sprint trends in the fourth quarter, we made the decision to suspend share repurchases as we continue to evaluate the best use of our excess cash. We would look for stabilization in growth of net income and free cash flow to support any resuming of share repurchases. In the meantime, our strong liquidity and cash balance gives us the opportunity to reinvest in the business and continue to return value to shareholders through our quarterly dividend.

Now some final comments on our outlook for 2012. As we indicated in our preliminary earnings announcement, we look for net income to be down in 2012 compared to 2011. We assume our Sprint business remains at its current run rate, making our comparisons in the first quarter very difficult. In fact, we are anticipating the first quarter results to be even more difficult than the fourth quarter of 2011. However, after what will be an extremely challenging first quarter, we expect to make steady progress throughout the remainder of the year and depending on the timing of new device launches realize sequential quarterly improvements in net income.

Furthermore, we expect to generate positive free cash flow this year with capital spending to support our core business and the payment of our dividend. Our CAPEX projection for the year is in the range of 70 to $90 million.

Now with that, I’ll pass the call over to Dorvin for his review of the financial results, after which I’ll provide some additional details on our plan go-forward. Dorvin?

Dorvin Lively

Thanks Jim. Good morning everyone. I’ll walk you through the financials, starting with our sales performance first. Our consolidated sales were up 6% driven by growth at our Target mobile centers. Sales at U.S. company-operated stores decreased modestly, down 1.4% in the quarter. During the fourth quarter, our comparable store sales were up 2.2% driven by positive comps at Target and company-operated stores in Mexico.

Before describing the platform performance within our U.S. company-operated store segment, I’ll point out that on a consolidated basis, our full-year sales results point to robust growth of the mobility platform. Even with the Sprint issues mentioned earlier, mobility grew 19% to approximately 51% of total sales for the year, up from 44% in 2010.

Okay, looking now at the U.S. company-operated store segment in the fourth quarter, we saw strong growth in the mobility platform offset by declines in our consumer electronics and signature platforms. I’ll describe each of these platforms in more detail. First, let’s start with mobility.

Mobility platform sales increased 15.7% in the fourth quarter, driven by strong growth in our AT&T post-paid business, incremental sales growth from Verizon net of T-Mo, and higher sales from tablets and e-readers. Sprint’s post-paid sales in the prepaid no-contract business declined in the fourth quarter. On a full-year basis, the mobility platform was up 5.6%. As Jim mentioned earlier, we now have Apple’s iPhone across all carriers, and this occurred during the fourth quarter of this year whereas only AT&T had the iPhone line-up in the prior year quarter.

Let me take a moment to add some additional detail to what Jim has described about the Sprint business. Historically our business with Sprint had been split fairly evenly between new customers and upgrade customers. Of the upgrade customers, about half of them were early upgrades as traditionally Sprint has offered an early upgrade program for a large group of customers. The initial changes to the Sprint customer model occurred last April when they modified the early upgrade program, affecting some but not all customers’ eligibility for an early upgrade. We started to see some impacts to our Sprint business as sales declined in the second quarter.

During the first half of the third quarter, our Sprint business had returned to very strong positive year-over-year trends largely supported by an aggressive promotion of the original Evo handset. In the latter half of Q3, the business declined as the pace of early upgrades declined. Rumors of a new iPhone available on the Sprint network gained traction and we began to see changes in the Sprint credit model. Despite these changes, our Sprint business was up in the third quarter.

We believe the decline in Sprint sales in the fourth quarter reflects further unanticipated changes to the Sprint customer credit model that took effect in early October. Sprint has now eliminated early upgrades for all new customers and we saw further changes to tighten the credit qualifications.

Given the relative size of Sprint within our mobility platform and the impacts that these changes had on our overall results, we wanted to describe these changes as clearly as possible; but be assured that Sprint remains a highly valued and important partner of ours, and we’re working closely and cooperatively together to make both our businesses better.

Now to Verizon. We’re pleased to have the number one wireless carrier in our mobility offering and pleased by the fact that Verizon comped positively compared to T-Mobile in the fourth quarter. We continue to be encouraged by our relationship with Verizon and the long-term opportunities that Verizon provides us. We do believe it will take time to fully develop the Verizon business and achieve its fair share. Keep in mind that Verizon has been included in our stores for only about five months now. We expect it will take time for the Verizon business to fully mature across all of our network of stores. As mentioned earlier, our AT&T business was strong in the quarter driven in a significant way by higher sales of iPhone and in particular driven by the new iPhone 4S launch, which occurred in the fourth quarter.

Also in our mobility platform, we had some other nice wins. Our efforts to expand our tablet and e-reader assortment throughout the year paid off. Our tablet assortment included the Apple iPad 2, the Kindle Fire, Toshiba Thrive, Playbook, and the Velocity Cruz, along with Nook and Kindle e-readers. These two product categories added meaningful sales and gross profit dollars to our results with benefits reflected in both the mobility platform and the signature platform as the tablet and e-reader accessories also increased strong in the quarter.

Our signature platform – sales through the third quarter were down 6%; however, sales in the fourth quarter were down only 1%. This marked a significant improvement in trend. We’re excited by the progress we’ve made here. During 2011, we had several initiatives aimed at improving our results in signature, namely increased investment in expanded assortments, improved in-store fixtures, targeted marketing programs aimed at reconnecting with our DIY customers along with the expansion of services and warranties to support our store experience. These initiatives all delivered positive results. Headphones, wireless accessories, tablet accessories, warranties and technical products all delivered sales improvements in the fourth quarter.

Let me call out our headphone category. This is an example of a product category where we had great success in the quarter. In headphones, we gained meaningful market share with our sales growing twice as fast as the industry sales. We truly became a destination for headphones during the holidays. We will continue to build on the successes that we’ve put in place this past year in signature, particularly headphones, tablet accessories and wireless accessories, and with our DIY customers who had recognized our genuine interest to reconnect with them and have rewarded us with their business once again.

Moving on to consumer electronics, our CE platform continues to be impacted by the overall difficult CE industry trends. The platform was down 29.7% in the quarter and 21.8% for the year. The category continues to represent a small portion of our consolidated revenues, less than 20% of revenues and less than 10% of gross profit dollars in 2011. We continue to manage our inventory in this category closely.

Before moving further down the income statement, I’ll comment on the results of our other sales channel. This channel is made up of our Target mobile centers, our dealer franchise network, Mexico operations, dot.com operations, and our support operations. The largest and most meaningful components are Target mobile, our dealer franchise network, and Mexico.

First, Target mobile – we ended the year with 1,496 mobile center locations within the Target stores. You’ll recall that the rollout of locations began in the third quarter of 2010 and was completed early in the third quarter of this past year. Our revenues within these categories are made up of predominantly post-paid wireless handset and warranty agreements. The gross margin rate for these sales is lower compared to the mobility gross margin within the RadioShack-operated stores primarily due to the handset mix within the revenues. As we’ve said, the growth in Target mobile sales via both the location expansion and comp store sales growth has moved our overall Company revenue to a higher mix of mobility.

From an operating income perspective, the Target mobile centers generated an operating loss in the fourth quarter and the year. This business is still in the very early stages of building customer awareness. We continue to work closely with Target to improve the business performance and initiatives. Our post-paid product offerings are now regularly included in the Target weekend circulars. Target mobile provides us access to a highly complementary customer demographic compared to our RadioShack customer, very strong traffic within Target along with control over a large number of points of distribution for our carrier and OEM partners. This positioning gives us further leverage as we grow our mobility business over the long term.

Our dealer franchise revenues declined in the quarter and for the year, largely reflecting the decline in number of dealer locations as we see agreements not being renewed in response to both economic and consumer spending pressures, along with cases where dealers are not fully compliant with brand standards. Locations are down about 9% at year-end compared to last year with revenues tracking similarly in the quarter and the year.

Now to Mexico where at year-end we operated 227 stores, up from 211 stores last year. Our Mexico operations continue to show improved performance with fourth quarter sales growth across all platforms and total sales up 7%, and comparable store sales up strongly as well. We see opportunities to continue to grow and improve our operations in Mexico, including opening additional stores in 2012.

Let me move on now to the gross profit. In the fourth quarter, gross profit was 482 million at a margin rate of 34.8%. Full-year gross profit was 1.81 billion or gross margin of 41.4%. The fourth quarter gross margin decline was primarily driven by three factors in order of significance. First, within mobility for the first time, iPhone was available across all three carriers compared to the prior year quarter when iPhone was only offered by AT&T. Additionally, the new iPhone 4S launch drove incremental sales of this popular device across all carriers. This, along with a higher mix of higher cost Smartphones, impacted our gross margin. Further to mix, tablets and e-readers, while driving gross profit dollars, blended down the overall margin for the platform.

Second, we had higher sales in our mobility platform driven by Target mobile center growth with incremental sales from more locations. With mobility gross margins below our average margin rate, this mix shifted negatively on our consolidated gross margin.

And then third and a far less driver in the change of the margins, we saw intensified activity surrounding promotions during the fourth quarter. Within mobility, our pricing strategy supported our objective to raise awareness of our overall mobility offering. In general, these promotions drove incremental revenues and gross profit dollars but had a negative impact on the gross margin rates.

Moving now to SG&A, looking at our core business excluding the Target mobile centers, our SG&A on our core business was down about 1% in the quarter. On a reported basis, consolidated SG&A in the fourth quarter increased to 431 million, reflecting the full roll-out of target but provided leverage as SG&A margin rate dropped to 31%, down from 32%. For the full year, core business SG&A without Target, and ex one-time items which included T-Mobile charge on the China plant closure, was down about 1%. Looking at the full-year breakdown of SG&A, you’ll note further reductions in rent and occupancy cost as we continue to manage our overall cost.

The effective tax rate in the fourth quarter dropped to 33% as a result of a larger than normal jobs credit and other one-time tax benefits. We expect our annual effective tax rate to be in the range of our historical average in 2012.

Now to the balance sheet. We ended the year with a cash balance of 592 million. We generated free cash flow for the year of 86 million. Our inventory stood at 744 million at year-end, up $21 million or 3% from the prior year end, supporting the continued growth in mobility products at our Target mobile centers and Company-operated stores. We’re comfortable with our inventory level and quality at the end of 2011.

In addition to our cash balance, our liquidity is bolstered by our 450 million revolving credit agreement which was undrawn with the exception of small letter of credit commitments. Our total CAPEX for the year was 82 million, which was in line with our plans and with our spending levels in the past several years. On an annual basis, our capital spending typically includes approximately 40 to 50 million for maintenance and compliance CAPEX. In our U.S. company operations, we opened 32 new stores, closed 42 stores, and relocated 71 stores in the prior year. For 2012, we’re planning for 70 to 90 million in capital spending, which is consistent with our past year spending. Wit maintenance and compliance CAPEX roughly 40 to 50 million, this level of spending gives us room for store expansion in Mexico, where we are realizing sales and profit improvements.

Now with that, let me turn it back over to Jim.

James Gooch

Thanks, Dorvin. So what does all this mean and what is our go-forward plan for 2012? Remember that our strategy remains focused on shifting to a broader and more compelling mobility portfolio while at the same time maximizing our profits in our traditional core businesses. This includes reclaiming our relevance within our signature categories such as DIY, technical, power and accessories, and harvesting profits in the declining CE category.

As we’ve noted, many of the initiatives we’ve put in place for 2011 have shown success and will continue to be a focus in 2012. First, we’ll look to maximize our position in mobility by improving our overall wireless awareness and improving customer retention. We’ve made significant improvements in our mobile offering. Today we have the top 3 post-paid carriers with the same great plans and leading prices on the best devices. However, despite the strength of our offering, our customer awareness remains a big challenge and a big opportunity.

Although we’ve modestly reduced our marketing budget for 2012, we’ve increased the concentration on mobility. Our marketing initiatives for 2012 are focused on implementing an optimized media mix to most effectively deploy our media assets in delivering sharper messages to our customers. So what does this mean? Last year, we completed a robust analysis of our media buying strategy so that we could optimize the media mix in 2012. We learned that although we don’t have any significant holes in the strategy, we certainly have opportunities to make each marketing dollar work better. Our plan this year is designed to target the channels and timing that we believe will yield the greatest influence on the overall purchase funnels for each of our merchandising platforms.

For example, in addition to increases in digital and social media, we’ll increase the use of TV to better communicate our mobility offering. We’ll also combine these messages with print, point-of-purchase and direct marketing to ensure that we’re connecting with the customers when and where they consume media throughout the mobility research and throughout the purchase process. We’ll refine the precision and sharpen the focus of every message we put in front of our customers so that we’re directly tackling the barriers to consumer consideration for our wireless offers.

Across the media portfolio, you’ll consistently see us emphasize top carriers, top devices, the same carrier plans, and all coming at great prices. Each of these messages is tailored to address the gap between consumer perception and what’s our in-store reality.

Our second key initiative this year is price optimization. We’re working on improving the price value perception for our brand. Our initial step launched here in the first quarter is our low price guarantee for mobile phones. Our competitive price analysis shows that we consistently beat the competition on price in mobility and other categories; however, research also shows that consumers are not giving us credit for our great prices. With our recently launched campaign introducing mobile low price guarantee, we’ll begin to close this price perception gap.

Another focus this year is enhancing our store experience through improved sales processes, better hiring, and our renewed focus on training. We know that getting mobility sales and service right in our stores is fundamental to delivering on our strategy. We’ve already seen benefits to our mobility sales process with the inclusion of our mobile low price guarantee, our Shack advisor, and our recently launched free mobile product support services. These services form a basis for differentiation and help us build a stronger service culture and connect with our wireless customer.

Finally, we’ll place renewed focus on our private label products this year. Private label has been and continues to be an important driver of gross profit dollars, but we’ve let our strategy become somewhat stale. Our plan this year is to review each private brand, looking to better define for the customer the role and the intent of each private label product and each private label brand within each of our categories.

With that, this concludes our prepared remarks. Operator, we’d now like to open up the call for questions.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, if you have a question please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press star followed by two. Questions will be taken in the order received. Please press star, one to begin.

And your first question will come from the line of Matthew Fassler of Goldman Sachs.

Matthew Fassler – Goldman Sachs

Thanks a lot and good morning to you. My core question focuses around your profit model as it relates to Smartphones and the iPhone in particular, and comparing the gross profits that you generate to the commissions that you have to pay out. Do the incremental gross profit dollars on a Smartphone sale, iPhone in particular, compare favorably to the cost structure or to the commission associated with selling that phone, because just looking at the direction of the sales and the direction of your EBIT, it seems like the incremental sales are not making you real money. Any color on that would be very helpful.

James Gooch

Thanks, Matt. Well, I think as we’ve said, the fourth quarter is not only really impacted by that growth in the iPhone business but also the significant shift in sales from some of the traditional handsets and from the Sprint dollars into the iPhone business. So that iPhone sale standalone is still a very profitable sale for us. The iPhone customer, with our ability to attach accessories to that sale, is still a very profitable customer for us; but what we had in the fourth quarter was probably the largest shift you’re going to see with the launch of the iPhone and non-iPhone, non-Smartphone units coming out, mainly in the Sprint business and not being cannibalized by the iPhone business but being in many instances replaced from a top line perspective by that iPhone business. To answer your question simply, yes, the iPhone economics are very profitable for us and I think the overall customer, again with our ability to attach to those devices, is a very profitable customer for us.

Operator

Your next question will come from the line of Dan Wewer with Raymond James.

Dan Wewer – Raymond James

Just to follow up, when you think about—let me ask the question this way. Is there a change in the incentive compensation for your salespeople given they’re getting a larger portion of their revenues from selling iPhones, which are not as profitable? And then just the other question I had – I’m not sure why the Company is keeping the $0.50 dividend, given that may equal 100% of your net income over the next 12 months, particularly if you thought it was a smart decision to eliminate via the share buyback program?

James Gooch

Well let me take the first one. At this point, Dan, we have several compensation tests going on out there. With the shift in business, we’re looking at how best to structure the compensation. There’s no direct plan, certainly, to reduce any of that compensation; but we want to make sure that we’re spending our dollars to drive the pieces of the business that we’re interested in driving. So at this point, I have no update on any significant changes to compensation.

And then as I said, from a capital allocation, we’re continuing to look at that with the Board and the management team. We did make the decision to suspend the share repurchase with the shift in business from Sprint, but we are committed at this point to continue to pay the quarterly dividend going forward.

Operator

Your next question will come from the line of Scot Ciccarelli with RBC Capital Markets.

Patrick Palfrey – RBC Capital Markets

Hi guys, this is Patrick on for Scot. Thanks for taking my question. I guess given the mix of mobile and iPhones that we saw in 4Q, is that a representative run rate for your gross margins going forward? And I guess why would it get better, if not?

And I guess just a second question, if I may, in your assumption for 1Q, are you assuming that the Company will lose money in 1Q from a net income perspective?

James Gooch

Let me take the first one. From the representative sample of the gross margin rate, we did have a significant mix of our business come from iPhone business with the launch of the 4S. I think there will be some normalization of that, but I’m not anticipating that mix to go down dramatically in 2012. The impact to the gross margin rate that I wouldn’t necessarily see going forward is the significant promotional activity that we saw in the fourth quarter. I think there will be some normalization of that activity in 2012, so I think there are opportunities. There are certainly opportunities for us to continue to do a better job on the signature product that you saw in the fourth quarter, and certainly an opportunity from a private label perspective to drive some of that business to help the gross margin rate. But whenever you drive the business through mobility overall and certainly some of our lower margin Smartphones, it does have a negative impact on our gross margin rate.

Q1 net income, as we said – well first of all, we don’t give quarterly guidance on earnings; but as we said, we do anticipate the first quarter to be more challenging than the fourth quarter, specifically with some of the run rate impact that we’re up against with the Sprint business and as we continue to mature the Verizon business going through 2012.

Operator

Your next question will come from the line of William Reuter with Bank of America Merrill Lynch.

William Reuter – Bank of America Merrill Lynch

Good morning. Just shifting gears a little bit, you guys have a lot of liquidity but you have some convertibles that come due in 2013. I’m wondering what you guys are thinking about for the different options and how we should think about how you might address those maturities?

James Gooch

We’re going through, just like you said, the different options. I think the market continues to change from a debt perspective, so not sure whether convertibles will be the option in 2013; but I would anticipate replacing some of that debt – chances are, probably not all of that debt – but we’ll take a look at it going through 2012 and into 2013, and if there’s an opportunity to be opportunistic with doing it early, we could look at that. But it will just depend at that time what the different debt markets look like.

Operator

Your next question will come from the line of Michael Lasser with UBS.

Chris Lang – UBS

Good morning. This is Chris Lang filling in for Michael Lasser. Can you break down the ticket and traffic trends in the fourth quarter in the Company-owned stores, and how does that compare to the last couple of quarters?

James Gooch

Well, we don’t give the specific detail on that, but I guess generally I would tell you that it’s been pretty consistent with the last few quarters. Traffic has been a little bit light. The tickets have gone more towards the mobility business, and so that will drive the average ticket up with that ring, so with our comp store sales and the average ticket going up, tickets tend to be down slightly.

Operator

Your next question will come from the line of Greg Melich with ISI.

Oliver Liao – ISI Group

Hi, this is Oliver for Greg. Can you just focus a little bit on the gross margin dollars from Apple iPhone versus traditional Smartphones and non-Apple phones, and then also the gross margin dollars from the Target kiosks versus historically the Sam’s kiosks? Thanks.

James Gooch

Well, we don’t go into detail on the specific profitability from the different devices, but I thin it’s fairly well known in the industry that the iPhone on the unit itself tends to be a slightly lower gross margin dollar than some of the other historical devices; however, we do continue to like that customer and our ability to attach accessories, attach warranty and other services to that product make that a very profitable customer for us. But as the business is driven by that device, it does have some negative impact on your overall mix.

From the Target business, you have to remember again that the majority of those sales are only the post-paid wireless devices, so we do not recognize the sale from a lot of those accessories and therefore our ability to attach those accessories or attach their warranties to impact the overall profitability of that market basket, you don’t see the impact of Target. So what’s happening to us in our corporate stores with the mix of mobility happens in Target, and that ends up having a more significant impact on the gross margin since that’s the majority of the sales you see in that business.

Operator

Your next question will come from the line of Gary Balter with Credit Suisse.

Seth Sigman – Credit Suisse

Hey guys. Good morning, this is Seth. Seems like you were surprised a couple times this past year by changes in the credit terms by Sprint. How much visibility do you have at this stage for the next couple of quarters, and is there a risk that maybe you see further tightening ahead? And then I have a follow-up.

James Gooch

We don’t tend to have a lot of risk. They control their own credit model. We’re trying to work with them to see—I think over the last two years, they’ve given us more exposure to what’s coming down the pipeline from a business perspective as we become more meaningful as a partner. But they’re going to continue to react to what they see in the market and make changes to their model as we see fit.

I would say, and I can’t stress enough, that both sides continue to work very well together and are very focused on long-term growth, and there would be no reason—I think this is a little bit of a level setting of that business, but I think once we get to that level setting of the business as we work through this quarter, I think both sides continue to be very focused to drive towards profitable growth going forward.

Seth Sigman – Credit Suisse

Okay, thank you. And then just given some of the challenge you are seeing in the core business, some of the mix issues that you’re seeing, how do you think about the opportunity to maybe right-size your store base at this stage and close some stores?

James Gooch

We still don’t have a significant number of our stores that are four-wall negative EBITDA, so closing of stores would not be a significant financial gain. I think we could lose something from a brand perspective if we didn’t have presence everywhere – I think that’s an important piece of brand. I think we could lose something from a vendor partnership relationship, and I think whenever you start closing stores, it’s challenging from a customer communication. So we’ll continue to work through our store portfolio as we have in the past. We have the advantage of having very short-term leases so we’re able to very flexible with openings, closings and relocations; and if that opportunity presents itself and if we think it’s financially, or from a business perspective going forward if that’s an opportunity, we’ll communicate that to everybody. But at this point, we certainly have no significant plans for additional store closings.

Seth Sigman – Credit Suisse

Okay, thanks. Good luck in the year ahead.

James Gooch

Thank you. Appreciate it.

Operator

Your next question will come from the line of David Gober with Morgan Stanley.

Shaun Kolnick – Morgan Stanley

Hey guys, this is Shaun Kolnick in for Dave. First just a clarification question – as we look at the net income commentary that you gave for lower than 2011, what is the clean number you’re looking at there? And then just secondly, as you look towards the first two months of the year, how has the promotional environment evolved compared to 4Q? Thanks.

James Gooch

So the clean number would be excluding one-time items. I don’t have that in front of me, but certainly you could follow back up with Molly and get that exact number. And then I’m sorry, I didn’t hear your second question?

I’m sorry, can we move on to the next question, Operator? I’m sorry, that second question did not come through.

Operator

Your next question will come from the line of Alan Rifkin with Barclays.

James Gooch

Morning, Alan.

Operator

Alan, your line is open. Please proceed. If your phone is on mute, please un-mute your line.

Your next question will come from the line of Brad Thomas with Keybanc Capital Markets.

Brad Thomas – Keybanc Capital Markets

Thanks, good morning. Jim, just wanted to talk a little bit more about this idea of the areas of your business that could normalize. Obviously there’s a lot of moving pieces here, a lot more change than we’ve seen at the Company. What are the areas that you think have the potential to normalize as we move into 2012, and as you look back at 2011, what do you think the drag was on earnings from the areas that you saw these significant changes?

James Gooch

Well, I agree with you – there’s been a significant state of transition, a lot of moving pieces in here, significant changes within the mobility business that historically and I think going forward has driven our growth. I think as we move forward within that mobility, we’re looking, as I said, for the Verizon business to continue to mature, and as that business matures and we have now the three largest post-paid carriers, an ability to have a much stronger stable foundation for that mobility growth going forward, not being so dependent on one carrier, which is where we were historically. The signature business, I think, has continued to normalize, continued to stabilize. I think our focus on private label, the growth in tablet accessories, the growth in headphones, the growth in wireless accessories has really helped to stabilize and normalize that business. The CE business will continue to be hit with some of the category declines there; but again, that business makes up less than 10% of our economics. So I think on the 90% of our economics, we have a real ability to stabilize and normalize and have a solid foundation for growth going forward.

Operator

Your next question will come from the line of Anthony Chukumba with BB&T Capital Markets.

Anthony Chukumba – BB&T Capital Markets

Good morning. Thanks for taking the question. I just had a question on the Target bull’s-eye mobile kiosk. It seems like the profitability is significantly lower than on your old Sam’s Club kiosk, and I guess I’m just wondering, one, why is that; and (b), what can you do to improve that profitability going forward? Thank you.

James Gooch

Thank you. Well the Sam’s kiosk, if you remember, we were recognizing sales also off of accessories, so with the Target business it’s only the post-paid business, or the majority of it is that. And then within the Target business, you’re seeing the impacts of the overall mix shift that you’re seeing in our corporate stores also. So I think the overall economics with some of the lower margin Smartphones that we’ve seen over the last year has had a significant impact on that Target relationship.

We’re working with Target to see what we can do there. I think there’s opportunities to improve the overall margin rate just like there is in our corporate stores, but we do have a few less levers with our ability to pull since we don’t recognize some of the sales on some of those other products, and it’s very important that we continue to mature that business and continue to grow the volume to get some leverage on the SG&A.

Well thank you. I think with that, I want to thank you all for participating in our call today and just close out with a few final comments. We believe that consumers want choice when making wireless purchase decisions. Offering this choice from the top carriers, from the top devices, the same plans as the carriers, and the full service mobile activation makes our value proposition to consumers sharper today than it ever has been. We’re 100% focused on communicating this message and continuing to be highly disciplined both within our use of cash and control of cost.

I realize we’re in a very transitional period and as a result what I’m committing to today is that we’re going to continue with our quarterly conference calls this year so that we can do our best in updating everyone on our progress. Thank you again.

Operator

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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