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RadioShack (NYSE:RSH)

Q1 2012 Earnings Call

April 24, 2012 09:00 AM ET

Executives

Molly Salky - VP, IR

Jim Gooch - President and CEO

Dorvin Lively - EVP, CFO, CAO

Analysts

David Schick - Stifel Nicolaus

Michael Lasser - UBS

Matt Fassler - Goldman Sachs

Vincent Sinisi - Bank of America

David Gober - Morgan Stanley

Mike Baker - Deutsche Bank

Dan Wewer - Raymond James

Gregory Melich - ISI

Carla Casella - JPMorgan

Operator

Expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from our forward-looking statements about those results. These risks are detailed in our various filings with the SEC, such as our most recent Form 10-K, as well as our news releases and other communications. The company does not undertake to update or revise any forward-looking statements, which speak only as of the time they are made.

We may also refer to free cash flow in our discussions today. Our definition of free cash flow is operating cash flow minus capital expenditures and dividends. Read page 21 of our Form 10-Q for a full description and reconciliation of free cash flow.

Finally, 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 can get to everyone's question during the call. Feel free to re-queue if you have additional questions.

Members of the media are participating in this call on a listen-only basis and should contact us after the call with their questions.

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

Jim Gooch

Thank you Molly and good morning everyone and thank you for joining our call today. As we described to you in February, we fully expect an extremely challenging first quarter and while we were prepared for the level of difficulty the quarter would bring, reporting a loss is certainly disappointing. That being said, we've seen progress from initiatives we began implementing last year including very importantly some improvement in our highest gross margin signature platforms. This program progress contributed to monthly sequential improvement and performance throughout the quarter and that's continued into April. As we look forward we're working with a great sense of urgency to drive topline growth, expand gross margin and reduce costs. We're building on our early successes and we are very focused on our strategic initiatives to capitalize on our greater series of opportunity. These include leveraging the work we've done to improve our product and service offering and strengthen our value proposition and mobility. Reclaiming and maximizing profits in our signature platform and pursuing growth opportunities all of which I'll talk to you about in greater detail in a moment.

First, let's take a look at the high level of results for the quarter. In our mobility business, we saw a very meaningful decline in our Sprint business in the first quarter. Sprint was still performing at a very high rate in the first quarter last year as initial changes to the early program weren't put into place until April of 2011.

The year-over-year decline in Sprint was personally offset by growth in our Verizon and growth in our AT&T businesses. Verizon sales continue to outpace the loss of T-Mobile sales from last year and while Verizon sales are still below our initial expectations, we believe that overtime; we can successfully mature the business and remain encouraged about the long-term opportunities this relationship provides.

Apple iPhone units continue to grow within our mobility sales. These iconic devices help drive traffic and carry higher than average attach rates to higher margin accessories. Tablets also contribute to mobility growth. We launched the new iPad in March and we continue to expand our iPad assortment with the availability of iPad now in 1,500 stores.

Looking over at our Signature business, that was a bright spot for us in the first quarter. As many of you know, this is a high gross margin platform and it’s a contributor of about 50% of our gross profit dollars if you look at our company operated stores. We saw an improvement in sales trend in the fourth quarter and that improvement continued into the first quarter. There were multiple initiatives we put into place last year in our Signature business that delivered traction this year. Some of these include the broadening and the strengthening of our assortments particularly in tablet accessories, headphones and wireless accessories. Our expanded warranty offering which improves our value proposition by offering the consumer the choice of both a one-time payment or a monthly recurring payment options. And improvements to our in-store selling processes and marketing programs which have helped us improve attach rates and reconnect with that DIY customer. Collectively we believe these initiatives are helping to improve our competitive positioning and enabling us to regain relevance with consumers in these Signature categories.

In short, our top (Audio Gap) in the first quarter however, we saw improvement in performance throughout the quarter and importantly we are seeing many of those trends continuing into April. Our action plans are aimed at driving topline sales, improving gross margin and aggressively reducing costs. We have a strong internal discipline in track record of effectively controlling SG&A and if necessary, we have the ability to take further actions to align our cost structure and improve operating profitability over the long term.

Now some final comments on our outlook for 2012. As we said last quarter we're looking for net income to be down in 2012 versus 2011. That being said, we are confident that we have the right programs and initiatives in place to drive sequential quarterly improvements as we move through 2012. Our solid cash and our solid liquidity position allows us to manage through this transition with maximum flexibility while reinvesting in the business to improve performance. In addition, our quarterly dividend remains a central component of our commitment to returning value to shareholders.

With that I am now going to pass the call over to Dorvin Lively for his review of the financial results after which I'll provide some additional details on our go forward plan. Dorvin?

Dorvin Lively

Good morning everyone. I'll walk you through our financial results starting with our sales performance first. Consolidated sales were down 1% in the first quarter primarily driven by $62 million decline in our US company operated stores. This decline was partially offset by $53 million increase in our other sales channel. That was driven by Target Mobile reflecting both year-over-year sales growth from existing mobile centers and an increase of 610 new mobile center locations in this quarter compared to the year ago quarter.

First quarter comparable stores sales were down 4.2% primarily driven by decline in Sprint postpaid wireless sales and a decline in our prepaid wireless business.

Looking now at the RadioShack US company operated store segment, in the first quarter we saw a 5% decline in mobility platform sales and a 24% decline in the consumer electronics business. On the positive side, our Signature platform sales increased 1%. Regarding mobility, the 5% sales decline in the first quarter was driven most meaningfully by underperformance of the Sprint postpaid wireless sales. I think it's important to note that the prior year first quarter was our strongest Sprint performance quarter last year. The Sprint business declines were partially offset by continued growth in our AT&T postpaid wireless sales, our tablet sales and a net increase in our Verizon postpaid wireless business compared to T-Mobile last year. that said, prepaid wireless sales continued to struggle with the loss of the T-Mobile prepaid business. However, we see our assortment improving led by stronger offering from Boost, which introduced two new Android smartphones in the first quarter and drove positive sales with Boost. We're working on our assortment across all cross bands within each carrier and supporting our prepaid business by improving our in-store execution.

With respect to our progress with Verizon, we're pleased with the fact that Verizon comps positively compared to T-Mobile in the first quarter and we're encouraged by the long-term opportunities that this relationship provides us. As we said, it will take time to build the consumer awareness necessary to more fully develop this business with Verizon. Verizon is new to many of our customers having been introduced in mid-September last year. I think it's important to note that Verizon is a wireless carrier that has not used the third party retailers to the same extent as the other carriers, so it will take time to educate the Verizon customer that that can go to RadioShack for Verizon products and services. Verizon has emphasized in our all of our mobility marketing and advertising and mobility marketing now makes up the majority of our total marketing investment. So while we have modestly reduced the marketing budget for 2012 compared to 2011, we have increased the concentration on mobility and particularly, we have increased the use of television marketing to better communicate our mobility offering.

Let's look at our Signature platform next, where sales increased 1%. This platform delivers our highest gross margin rate representing 30% of sales and about 50% of our gross margin dollars for US RadioShack company operated stores. This marked the second sequential quarter with a significant improvement in sales and trend. As Jim stated, we put several initiatives in place last year aimed at improving our results in Signature and we are pleased to see continued traction in the first quarter in the form of further sales improvements in tablet accessories, headphones, wireless accessories, our warranty services and our technical products.

Moving on to our consumer electronics platform, this business continues to be impacted by overall difficult TE industry trends. Our sales declined 24% in the first quarter. The category continues to represent a small portion of our overall business at less than 20% of the consolidated revenues and less than 10% of our gross profit dollars in 2011. We continue to maximize profits where we manage our inventory very closely in this platform.

Just a final note on our US RadioShack company operated stores. We ended the quarter with 4,435 stores, down 41 stores in the quarter. As a reference point, last year in the first quarter our store count declined by 19 stores. As many of you know, in a typical year we have approximately a 1,000 leases that come up for renewal giving us the opportunity to reevaluate a quarter of store base each year. we evaluate the location, rent and occupancy cost, changes in the market and demographics to determine whether we should renew, relocate or possibly close a location. This year, the timing of lease renewals gave us the opportunity to evaluate a large number of stores in the first quarter. After a full review we decided to close 40 stores, about half of these were mall locations.

Before moving further down the income statement, I'll briefly comment on the results of our other sales channel. This channel is made up of Target Mobile centers, our dealer or franchise network, our Mexico business, our dotcom operation and our support operations, the largest and most meaningful components are Target Mobile, dealer franchise and Mexico.

First, Target Mobile. As we said before, our Target Mobile center business is still very young we are in the early stages of building consumer awareness of our product offering at Target. In fact, we have more than 600 stores slightly less than half that have been operating less than one year. operationally we've hired and trained a significant number of new Target Mobile associates over the past year as we rolled out new stores. We've made some changes to our operation model as we examined the structure in light of traffic patterns and wireless sales within the store. We believe these and other changes under development will yield operating efficiencies. Keep in mind that we ended 2010 with 850 mobile center locations and only completed the rollout up to the current 1,490 locations in the third quarter of 2011. While we are not yet achieving the level of profitability was expected from this relationship, we are working diligently on initiatives to drive performance improvement. As an example of how we work to improve this business, our close beta offerings are now regularly included in the target we can circular. We’re also looking at how best to optimize in store merchandising working to improve the mobile center operating model and productivity by adjusting operating hours and product assortment on a per store basis. Be assured that we are dedicated to making this a profitable business.

Our dealer franchise revenues decreased in the first quarter in line with the decline in the total number of dealer and other outlets where locations dropped by 60 or 5% compared to the first quarter of 2011. We've seen declines in the overall number of locations as certain agreements are not renewed and in some cases as a result of economic pressures the dealer is experiencing and in other cases as a result of compliance or performance issues with the dealer. Our international dealer and franchise is a small but growing part of this business segment. In March, we announced a new master franchise agreement with Berjaya for 10 southeast Asia countries including Singapore, Vietnam, Malaysia and Thailand.

Berjaya plans to open 1000 stores over the next 10 years with the first store opening in Kuala Lumpur this summer. We're excited to partner with Berjaya who bring significant retail real estate and country specific expertise to our relationship.

Outside of Mexico Berjaya is an example of our strategy to grow internationally. We have a small team dedicated to evaluating these opportunities and we see the potential for additional international franchise agreements similar to Berjaya.

Now onto Mexico where at quarter end we operated 225 company owned stores compared to 212 stores last year. Our stores in Mexico continued to deliver strong sales and comp store growth along with improved gross profit dollars and lower SG&A expense margin.

The sales growth is balanced across all product categories and across all locations and regions within the country. We see opportunities to further built our network of stores in Mexico and plan to open approximately 50 new stores in the country this year.

Now let me move on to gross profit. In the first quarter consolidated gross profit totaled $395 million, representing 39.1% of net sales compared to 44.7% in the prior quarter. The year-over-year decline of 560 basis points in the first quarter gross margin was primarily driven by two factors. First, a mix shift within mobility sales towards lower margin smartphones and tablets and second a higher percentage of mobility sales in the overall revenue mix that was largely driven by the expansion of Target Mobile centers I discussed earlier.

As we saw in the fourth quarter we now have the availability of iPhone on all three postpaid carriers versus just with AT&T in the year ago quarter. This resulted in a meaningful shift in a mobility sales mix in the current year quarter as compared to 2011 with a higher mix of iPhone sales. The iPhone sales mix in the first quarter was similar to our prior year fourth quarter. Adding to this was the continued shift of higher cost smartphones versus feature phones as well as higher sales of tablets.

Further to the margin shift is the impact of Target Mobile. Our Target Mobile sales are made up of predominately postpaid wireless products and services and as a result carry a lower gross profit margin than our consolidated RadioShack gross margin. As Target Mobile revenues have grown as a percent of our total revenues, this revenue mix shift has weighted down our gross margin rate.

This mix issue was partially offset by improvement in signature platform sales. As Jim described earlier, this is one of the years we continue to focus on and we see opportunities for further improvement. Growth of signature platform sales can drive both growth and gross profit dollars and the improvement in our gross margin rate.

Let me move down to SG&A. Our consolidated SG&A increased slightly to $373 million in the first quarter of 2012 compared to $371 million last year, primarily reflecting the full roll out of Target Mobile and the associated higher compensation expense. This was partially offset by lower marketing and advertising in the quarter.

Looking at our core business, excluding the Target Mobile centers which are not yet fully comparable on a location basis SG&A was down about 2% year-over-year primarily reflecting the lower advertising and marketing expenses.

A couple of points on advertising and marketing. The first quarter decline reflects our planed shift in some marketing spending this year. We anticipate total spending to be modestly down for the full year compared to last year. That said we expect the marketing dollars to be highly effective and more productive this year as we put more focused messaging in place and optimize our medium mix.

In the first quarter we reduced spending on print circulars while we increased our support of digital, social and search. Our spending also supported an increase in TV exposures and as we said before we've increased the concentration on mobility across all marketing media.

Let's look at the balance sheet next. We ended the first quarter with a cash balance of $594 million which includes cash and cash equivalents of $566 million and a restricted cash balance of $28 million reflected in our other current assets on the balance sheet. This restricted cash is a voluntary pledge as collateral for a Letter of Credit issued to our general liability insurance provider which we have the ability to withdraw at any time. This pledge of cash is a less expensive way to meet our collateral obligation versus a letter of credit.

We generated free cash flow in the quarter of $25 million. Inventory was $730 million at quarter end, down $8 million or 1% from the end of first quarter of 2011 despite incremental levels to support continued growth of mobility products at Target. From year end our inventory declined our $14 million or 2%. We're comfortable with our level and quality of our inventory at the end of the quarter.

In addition to our cash balance our liquidity is bolstered our $450 million revolving credit agreement which is undrawn with the exception of the small Letter of Credit commitment. Our total CapEx was $11 million in the first quarter and we continue to expect spending of $70 million to $90 million for this year which is consistent with the levels in the prior years. With maintenance and compliance CapEx at roughly $40 million to $50 million this level of spending continues to support investment in certain initiatives designed to grab sales and improve profitability.

Now with that let me turn it back to Jim who will provide further detail on our key strategic initiatives.

Jim Gooch

Thank you Dorvin. As I touched on earlier, our key strategies remain focused on our ongoing shift to mobility while reclaiming relevance and profits in our signature platform all the while continuing to pursue select incremental growth opportunities. Let me first start with mobility. This is our highest platform and one that's supported by our convenient small store, high touch, high service model.

Last year we made great strides in both broadening our product assortment and making it more compelling. We now offer the top national wireless carriers their same rate plans, their best handsets and we backed this offering with our low price guarantee and our unique service offerings.

Our transformation is still a work in progress. We the biggest opportunity to drive new competitive position as by increasing consumer awareness and consideration of not only our improved offerings but also our strong price and strong value proposition.

To that end our media spend in 2012 will have an increased focus on mobility with a sharpened message around our wireless message. For instance our media spend in the first quarter supported two incremental weeks of TV and earlier this month we promote an incremental trade and save event that was very successful in raising customer awareness about our flexible hassle free consumer friendly trade in program.

We are excited about our marketing plans this year. In fact this month we selected a new lead advertising agency grey out of New York and we expect to fully transition them into our business by June of this year. We are also in the process of improving our online capabilities with the new VP of Omni-Channel now in place. Our initial focus is going to be on implementing enhancements to our RadioShack.com site that will improve functionality and the overall customer experience and with studies showing the 75% of consumers research online these enhancements will be aimed at facilitating mobile research and providing a seamless Omni-Channel sales experience for all of our customers. We expect to have more specific plans and share progress with you later this year.

Looking to the remainder of 2012 we plan to build on the first quarter mobility focused TV campaign with more incremental TVs starting in the second quarter. We will also be kicking off an enhanced direct mail and e-mail campaign leveraging upcoming gift giving occasions and look forward to following that up with the launch of an entirely new creative campaign in the second half of the year.

With respect to improving price value perception of our brand we are pleased to have launched our new low price guarantee for mobile products in the first quarter. This competitive price guarantee is an insurance for our customers, an initial step in reshaping our price perception. We are also in the process of putting several changes in place to enhance the store experience. For instance we are adding new certification programs to our store associate training programs focused on key product categories such as mobility, DIY, CE and also some specific training for Apple products. These programs are going to help us increase a level of expertise our store associates provide to our customers.

Our second area of focus is reclaiming relevance and maximizing profits in our signature platform. Private label has been and continues to be an important driver of gross profit dollars in this platform but admittedly our strategy here has become somewhat stale and confusing. Our plan this year is to refocus our private label brands with our well-articulated strategy that better defines the role and intent of each private label product and of each private label brand. We expect to complete our plans for private label products in the second half and look forward to sharing more information with you as we finalize our plans.

Value perception is also important part of the equation. In the first quarter we implemented price optimization initiatives that we believe have begun to improve customer value perception. We will continue to refine prices to maximize profitability using our key value items to drive price perception. An example of this is we've seen great success with our premium price headphones with category sales of more than 30% in the first quarter. This category will have done a great job of more clearly articulating the value proposition to customers and where we plan to going to build on consumer interest by introducing exciting new brands.

At the same time as we build on our core mobility and signature platforms we are also pursuing certain opportunities to provide incremental growth and diversify our overall business. In this regard we continue to focus on our opportunity in Mexico with the expansion of our company operated stores. These stores have been delivering improved performance and this year we expect open approximately 50 new stores. And then finally we continue to explore certain select international ventures such as the recently announced master franchise agreement of 1000 stores in ten Southeast Asian. Agreements such as these position us to broaden our brand reach, leverage our brand equity and generate incremental earnings all with minimal capital investment or operational resources required.

In conclusion we are acting with a great sense of urgency and a very defined set of initiatives that build on the work we did last year and had been gaining early traction. We remain committed to our stringent cost control and cash management and are confident in our ability to drive sequential quarterly improvements throughout 2012.

With that this concludes my prepared remarks and operator; we would now like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes in the line of David Schick who is with Stifel Nicolaus. Please proceed.

David Schick - Stifel Nicolaus

I guess the question is that you guys I think have been clear about the pressures being on the business overall year-over-year due to the issues you talked about and now you're saying and I think you have said before things would sequentially improve throughout 2012 but I guess without that traction with just discussion or without traction just how should we have confidence that that traction can occur on a sequential basis as the year plays out? What are the things would need to pass fail or happen or not happen to have that play out because we can't look necessarily at attractions that that yet occurred and as part of that, sort of sneak one in you know, you've talked about 25% of the store leases up for renewal and you closed more than usual during the last quarter. Would part of it be removal of bad stores, of stores that are dragging down the base.

Jim Gooch

I think to answer your first question many of the initiatives that we discussed we are starting to see traction against it and we think that many of those are going to help us drive the sequential improvement when you start talking about wireless and the awareness and the growth that we've started to see from the Verizon Business. We continue to see strong performance around AT&T and not with getting the comparables behind us on the Sprint business, we would anticipate a stronger mobility business going forward. We're happy as we said to see some traction on the signature business in both the fourth quarter and the first quarter than we would anticipate that moving forward and then some of the incremental growth opportunities that we discussed, even though they may not be meaningful in the short-term, I do think provides us a long term growth opportunities.

As far as store closures I would not look at the 40 as anything specific to driving this sequential improvement, its more as Dorvin said a normal review and maybe a little bit of a higher amount than what you've seen in past years but I would attribute that more just to the timing of when some of those leases came up, specifically some of the mall locations and I would not anticipate any significant number of store closures going forward.

Operator

Our next question comes from the line of Michael Lasser with UBS. Please proceed.

Michael Lasser - UBS

It's actually a two part question. The first part is, can you contrast what your strategic priorities are today to what you've been doing over the last couple of years. Like it seems as though your focus on the marketing method is similar to what you had been doing with the Shack campaign, seems like on the signature side you've already focused on some of the private label offerings and so it's not as easy to tell where the differences are today and then secondly, if you look at the store in totality, maybe you can give us an update on what you think you need to do on the merchandising side to retain customers once you've built that awareness.

Jim Gooch

So I think with regards to your first question, I would look at the shack campaign as more of a overall general (inaudible) message and I think our messaging going forward is going to be much more targeted, have been much more targeted to our mobility offerings and specifically what that customer can expect with our mobility offerings which are now the top three carriers with all their best devices, competitive pricing with our service model.

I think you will also see a more targeted message to that DIY into that signature customer and once we develop what our private label strategy will be, there will also be some messaging around that. So where the Shack campaign I think served its purpose at a point in time, our messaging going forward will hopefully be much more targeted to we think our competitive positioning and what that wireless proposition is. As far as store in total we are I think happy with happy with our overall product offerings today with adding Verizon in - I wouldn’t anticipate seeing any significant shift in our overall merchandising mix but we do need to increase this overall awareness, you will see that not only from a marketing campaign but also from what we are trying to do in store from a messaging there not only from a wireless carrier perspective but also from you are starting to see some messaging around our low priced guarantee and I think you will see a much more consistent messaging from what we are doing on an advertising campaign perspective and that continuing into our stores.

Michael Lasser - UBS

So if I could just clarify because one confusing element of the story is that with your mix going more towards mobility and especially lower margins smart phones. It's hard to envision what the ultimate margin profile of the business will look like because the strategy is continue to emphasize some of these shifts.

At the same time the cost structure doesn’t seem to be supportive of the move towards an inherently lower gross margin profile.

Jim Gooch

Yes and I think as I said it's going to be important for us to chip away at all three components. So, you will see us on top line growth, we are going to need some top line growth and we think the mobility business will support that. At the same time even though we are under margin pressure from that mobility business we have many initiatives around signature initiatives around private label, initiatives around pricing. This should help to stabilize that margin going forward and then we continuing to aggressively go after SG&A reductions on a day in and day out basis.

As I look to balance this economic model going forward, I don’t see it coming from one component. I think you will see us move all three components to get back to an economic model that we are happy with.

Operator

Our next question comes from the line of Matt Fassler with Goldman Sachs. Please proceed.

Matt Fassler - Goldman Sachs

I have a quick question on Sprint and then a follow up on the financial model. Can you update us on the status of our relationship with Sprint, are we seeing just a continuation of the trends that unfolded periodically last year and once you cycle that, that business flatten out or grow again or is there ongoing disagreement about the dynamic of upgrade agreements and the relationship between the two of them.

Jim Gooch

So, I would characterize a relationship with Sprint as very strong today. I wouldn’t say that there was a disagreement on the upgrade, that Sprint change was across the industry, it wasn’t anything specific to our business and I think now that we have anniversaried their major change to their early upgrade model. I would be hopeful that we can return this business back to growth going forward.

Matt Fassler - Goldman Sachs

Got it, okay that’s helpful and then secondly if I could just by a way of follow-up. On the outlook for subsequent quarters, so here we have gross margin at about 39%. They are typical as not a whole lot of seasonality and gross margin in the first three quarters of the year when underlying trends are fairly similar.

In your view what it takes on the gross margin going forward at least prior to Q4 in order to make the margins make it seasonal step down and is this is the level to build off of or is this kind of the baseline to think about?

Dorvin Lively

I would look to at and say it's a level to build off, certainly many of the initiatives that we discuss especially around the signature products should hopefully help that gross margin rate but I wouldn’t anticipate going forward continued margin pressure as we have seen in the fourth quarter and in the first quarter from the mix of mobility. So as a base line I wouldn’t anticipate that significantly changing.

Operator

Our next question comes from the line of Vincent Sinisi with Bank of America. Please proceed.

Vincent Sinisi - Bank of America

Also wanted to ask little differently about your advertising campaign, how should we look at the balance, you said going forward continue to increase TV advertising, focus on mobility but yet you know you also some improvement in your signature category and that’s obviously your higher margin category. So, how should we look at I guess both Cadence as well as the mediums that you are using TV versus direct mail and email and the mix between those two categories.

Jim Gooch

And that’s a challenge that we have been talking about with the new agency, it will be a mobility focused advertising campaign but we cannot ignore and we need to reconnect back with that signature and that DIY customer when you look at the profitability of that business provides to us. So, the growth will be driven by the mobility business and so that will be focused one but I think focus 1A will be figuring out how we do a better job connecting and discussing what we have to offer to the signature and the DIY and that very well may come through different mediums to your point whether that’s direct mail, email social, digital media so I would anticipate the majority of the focus on the TV more around wireless and mobility but some of those other vehicles maybe a little bit more focused to signature DIY.

Vincent Sinisi - Bank of America

OK and when you say that you know a new creative campaign beginning in the second half of this year, can we think of that as largely different from what we will be seeing over the next quarter or the same basic message but maybe just portrayed a little differently.

Jim Gooch

I would say over the next quarter was taking what we had with the old agency and trying to improve it and trying to tweak it. So over the next quarter is headed down more of the direction that we want to see in the back half but just not all the way there.

Operator

Our next question comes from the line of David Gober with Morgan Stanley. Please proceed.

David Gober - Morgan Stanley

I was just wondering if you can touch on capital allocation and the balance sheet for a second. I know we are still a little more than a year away from the convert maturing but just wondering what the early plan was to address that how should we think about the dividend over the next year or so as we approach that maturity.

Dorvin Lively

Well the dividend is going to remain at central component of what we are doing, so I would think about the dividend as a piece that will continue forward. There are absolutely no plans to discontinue that dividend, as far as some of the maturing debt coming due, we are in conversations today on that. I don’t think we have anything specifically to share but I would anticipate as probably putting something else in place that may not be of the same amount as what will be replacing and may not be of the same type but we will probably be out in the market in some form of fashion.

Operator

Our next question comes from the line of Mike Baker with Deutsche Bank. Please proceed.

Mike Baker - Deutsche Bank

So, a question and follow up, first question is on the target business, in your (inaudible) it was the loss was $17 million more in 2011 versus 2010, how is that looking in the first quarter and your expectations for 2012. Is it, your expectations for it to lose money but less money or perhaps be profitable this quarter and then so if you could answer that then I will ask for a follow-up. Thanks.

Jim Gooch

Maybe I will answer, Dorvin has over seen the target maybe I will throw this over to him, but I would say that our team within target is doing a nice job of improving the business.

They are under a lot of the similar pressure that we are under as in our company stores from the margin rate related to the wireless business. So that’s the struggle. So I would anticipate seeing improvement whether we get back to a level of profitability by the end of the year, that’s hope of this business at some point but we have a lot of challenges in that business.

Dorvin Lively

I might just add to that, that in some ways it's the same difficulties that we have in our stores from an awareness perspective so this is a brand new business and we are trying to grow that business with target and get that awareness there and I think there has been some warnings in these early stages with how shoppers cross different departments and learning those traffic patterns to better staff the right hours for each of those stores but I think with some of the changes that we have made in the operating model to this point and something’s we are working on. I do believe we can get that business to profitability.

Mike Baker - Deutsche Bank

Okay thanks and then the follow-up is on the expenses, you guys do a great job up on your case giving us each of your expense items but as I look at it this falls up to other people’s question. I am just trying to figure out where there is room to cut costs, it sounds like the advertising isn’t going down, I guess the rent will come down a little bit as you close some stores but one of the big buckets but you feel like you can pull some expenses out to try to align to a lower gross margin structure.

Jim Gooch

How we are thinking about expenses today, is I do think - we have said this before that it's part of our DNA of aggressive managing SG&A and as Dorvin said if you pull out the target numbers on a year-over-year basis we are down right now. So we are going to aggressively go after every line item. I wouldn’t say that there is one line item where you can anticipate a significant one time reduction. And then also what we are looking at right now with all of these initiatives there is resources against that so when we get a better sense of the productivity of the initiatives and which initiatives are going to be meaningful for us going forward we will put resources against those and if other initiatives are not going to be meaningful, we will reduce those SG&A expenses going forward.

So I would say give us a quarter or two to work through, where we are going to focus our attention. We will take a look at how the sales are looking, what the gross margin really looks like and as I said if there is a need to go back and right size that SG&A and be more aggressive I think we have proven that we have the ability to do that.

Operator

Our next question comes from the line of Dan Wewer with Raymond James. Please proceed.

Dan Wewer - Raymond James

So thinking about target mobility, for this to be long term viable it has to be profitable for both RadioShack and target. Yet there is two inherent problems aren’t there, operating expenses, RadioShack doesn’t participate in the attachment of the higher margin accessories and then second there is a seismic change in wireless margins after you sign this agreement with target.

So my question is do you think target is willing to rework the agreement to improve the economic for RadioShack perhaps at the extensive target and if not, can you remind us as to when the target agreement expires and the potential willingness of RadioShack to walk away?

Jim Gooch

Well we haven’t given the timing on the deal expiring so I don’t think we are going to focus on that. As far as targets willingness both sides have been very willing to improve the operating performance of this business and I think both sides have an interest of this business continuing to go forward and I think you hit on the points that we are dealing with, both sides are very aware of those points. There is a lot of moving pieces that we might be able to put into this conversation to make it attractive for both sides and we are having those ongoing conversations and hopefully I think going forward we will have more information to share with it.

Dan Wewer - Raymond James

Okay and this is a follow-up, can you tell us what’s happening in your postpaid business that leading to another sale decline the stores that we visit the postpaid category gets prime space inside your stores, now perhaps we are beginning to see the impact of ecommerce, beginning to negatively impact the wireless category like in consumer electronics.

Jim Gooch

Now I don’t see the ecommerce being the driver, it's really the Sprint business on the comparable with the last quarter of their early upgrade change, and so I think going forward I would anticipate growth coming out of our mobility business.

Operator

Our next question comes from the line of, Gregory Melich with ISI. Please proceed.

Gregory Melich - ISI

Can you give us a little more insight on who are your most important mobility, vendors now, as AT&T now the largest Sprint and then Verizon or how is that has played itself out.

Jim Gooch

I don’t think we have given the specifics on how those breakout, I think what we said in the past is as the Verizon business grows and as the Sprint change came with the early upgrade model, the three are becoming more equal where before Sprint was far in a way the largest and now we are I think going forward. We are not there yet but we would anticipate a much more evenly balanced business.

Gregory Melich - ISI

Though in the first quarter it looked roughly evenly balanced.

Jim Gooch

We are not quite there yet but it's heading down that direction.

Gregory Melich - ISI

And then second, I think in the 10Q you guys mentioned that you might not meet your fixed charge coverage ratios, could you just describe what will be the variant that could make that occur and what the implications could be.

Jim Gooch

Just the operating performance, so we threw that out there depending on how these trends go, there is a component of that that’s operating performance but when you look at our strong liquidity we anticipate that having absolutely no impact what so ever on the business.

Operator

Our next question comes from the line of Carla Casella with JPMorgan. Please proceed.

Carla Casella - JPMorgan

You mentioned in maturities made some pricing changes, can you talk about where the biggest changes have been and how much on average you brought prices down and if there are any that you actually brought up?

Jim Gooch

I think we are balancing them out and we are looking also at regular pricing and promotional pricing. So, I would say not so much of raising or decreasing, taking a look at what are those key value items, what are the prices that the customer is recognized make sure we are appropriately priced on there. Make sure that we are not doing anything on the other side to give away margin dollar.

So we are been much smarter about that, we have a team that I don’t think we had a lot of focus on that historically. It's not only looking at that but we are also starting to look at things like zone pricing and we might have opportunity there. So there will be some going up and some going down but I think overall those key value items the prices that the customers are looking for on a day in and day out basis we are going to be much more competitive.

Carla Casella - JPMorgan

Okay and then as a follow-up you mentioned that signatures is now 50% in gross profit margin or gross profit dollars. Is that in the first quarter, is that really on a ongoing or LTM type basis?

Jim Gooch

It was last year.

Operator

Ladies and gentlemen that will conclude the Q&A portion of our event. I would now like to turn the presentation back over to Mr. Jim Gooch for closing remarks.

Jim Gooch

I want to thank everyone for participating in our call today and certainly look forward to updating everybody throughout the year on our progress. Thank you again.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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