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RadioShack Corp. (NYSE:RSH)

Q4 2007 Earnings Call

February 26, 2007 9:00 am ET

Executives

Martin Moad - VP and Corporate Controller

Julian Day - Chairman and CEO

Jim Gooch - EVP and CFO

Bryan Bevin - EVP of Retail Operations

Peter Whitsett - EVP and CMO

Analysts

Robert Higginbotham - Goldman Sachs

Scott Ciccarelli - RBC Capital Markets

Seth Sigman - Credit Suisse

Irena Golub - Merrill Lynch

Adam Syndler - Deutsche Bank

Jeff Feinberg - JLF Asset Management

Gregory Melich - Morgan Stanley

Operator

Good morning and welcome to the RadioShack Corporation's Conference Call. All lines have been placed on listen-only mode, and as a reminder this conference call is being recorded. After the speakers’ remarks there will be a question-and-answer period.

Due to today’s limitation on time, the company requests that participant’s limit follow-up questions to one per caller. (Operator Instructions) I would now like to introduce you to your host for today’s conference call, Mr. Martin Moad, Vice-President, Controller. Mr. Moad, you may begin

Martin Moad

Thank you and good morning. Welcome to RadioShack's 2007 Year-end and Fourth Quarter Earnings Call. Today, we will hear from RadioShack executive management followed by a Q&A session.

By way of reminder, the comments we'll make today are subject to the SEC’s Safe Harbor provisions. During our commentary and the question-and-answer session, we will make forward-looking statements. These forward-looking statements involve risk and uncertainties and are indicated by words such as anticipate, expect, believe, goal, will, intend, likely and other similar words and phrases. We can give no assurances regarding the achievement of these forward looking statements. The actual outcomes may be significantly different.

Additionally, we expect that these forward-looking statements will change in the normal course of our business and management specifically disclaims any obligation to update forward-looking statements that we may make on today’s call. You are encouraged to read our 10-K and 10-Q filings with the SEC for a more complete discussion of the major risks and uncertainties that affect our business. RadioShack filed with the SEC today, it’s form 10-K for the year-ended December 31st, 2007 and I would encourage you to review this document as it goes into more explanation describing our 2007 results.

And now I will turn it over to our Chairman and Chief Executive Officer, Julian Day. Julian?

Julian Day

Alright. Thanks Martin. Good morning everyone. First off, I want to personally welcome each one of you to our Earnings Call here this morning. So I am going to begin by introducing the members of the senior leadership team who are with me on this call. Jim Gooch, our EVP and Chief Financial Officer, is going to kick things off by taking you through our financial results, both for the quarter and for the year.

I also want to introduce two newcomers to our team: Bryan Bevin, EVP for Retail Operations, and Peter Whitsett, our EVP and Chief Merchant, who are also sitting with me and will be joining us on this call.

Both of them have joined the senior leadership team recently and both have perspectives on the future development potential for our business that I have asked each of them to share with you on the call.

Before I go ahead and hand over to Jim, though, I thought I might take the opportunity briefly to report back to you on our progress against the goals we set ourselves for 2007. Same goals we talked about on the same call a year ago. The first initiative we set ourselves was to improve the in-store experience for our customers. I would say we made some real progress in this area. This was as a result primarily of the reorganization in our field management organization, and as a result of continued focus on the in-stocks and quality of inventory.

We won the Real People number one Customer Service Award for consumer electronics at the end of last year, which served I think to confirm our place at the highest level of customer service-oriented retailers in the U.S. Nonetheless, I do believe, and I think both Bryan and Peter believe, there’s considerably more progress we can make in this area and I'll ask both of them to share their initial thoughts with you in a few minutes.

We also set ourselves the goal of increasing gross profit dollars. In this year-over-year we were not successful, partially because we operated with almost 500 fewer stores in 2007 versus 2006. Aggregate gross profit for the year dropped approximately $100 million for the year in spite of an improvement in gross margin rates for the whole enterprise of approximately 300 basis points.

As I mentioned a second ago, we took actions to improve the quality of our inventory during the year, which also has the effect of costing us the gross margin money. Though, the most important factor influencing our dollar gross margin was our top-line sales, which were not as strong as we expected.

Jim will talk about this in a little more detail in couple of minutes. But suffice to say, for now our sales of Sprint handsets plans and related accessories, while in line with Sprint's reported results, were very disappointing to us throughout the year and were a major contributor to our sales and margin shortfall. On the upside, Bryan and Peter will also be offering some comments on sales opportunities which faced us for 2008 with which we intend to capitalize.

Okay, our third goal was to aggressively manage all expenses. In this area we did achieve a high degree of success, reducing aggregate operating expenses by over 250 basis points for 2007 compared to 2006.

We believe we were able to reduce operating costs in our business while at the same time improving our ability to execute. Cost control is going to remain a key element of our approach over the next year, though we expect that earnings improvements in 2008 are more likely to come from sales and margin improvements than from continued large scale cost-reduction.

Lastly, as to capital allocation, I would say that while we clearly did a better job of allocating capital to high return projects in our company, I would also say that we didn't find enough opportunities to invest incremental capital at a high rate of return last year. In retrospect, this was primarily because a large part of the year was given over to operational restructuring of one kind or another, and investment opportunities, notoriously difficult to identify, in an environment in which the business model for the company as a whole is in state of change and improvement.

We believe, and I think the financial results for our company confirm this, that we now have a robust economic model in place for our company. This is going to allow us to allocate more capital to the business in high-return areas in support of our goal to increase the profitable throughput for our business model in 2008.

So, with that as an overall introduction, I'd like now to hand over to Jim for the detailed financial results, followed by Peter and Bryan who have some exciting thoughts to share with you on development opportunities for our business. So Jim, over to you.

Jim Gooch

Thank you Julian and good morning everybody. My plan today would be to focus a majority of my comments on the fourth quarter. Even though, unlike the first three quarters, many of the improvements that we see in the fourth quarter are up against improvements that Julian and I put into place when we joined the company in 2006. However, this is given that most of the relative trends and drivers of those fourth quarter improvements are still consistent with what we saw during the first three quarters.

As we released this morning, our fourth quarter 2007 earnings per share were $0.77. This compares to a reported $0.62 last year or $0.15 improvement. Looking at the full year we have earnings per share of $1.74, which means a very healthy $1.20 increase versus the reported $0.54 from last year. But I would say this is where we recognize that there is clearly a room for improvement and there is clearly more work to be done.

When you look at the challenging, not only the macroeconomic environment, but the highly competitive environment that we operated on there, especially over the past several months, I would say that overall we're very pleased to be able to deliver a very healthy increase in profitability, that you see not only in the fourth quarter but throughout the year.

As far as the drivers of this increase, they were fairly consistent in the fourth quarter with what you saw in the first three quarter's. Specifically improved gross margin rate, reduction in SG&A expense, reduction in net interest expense and all of that favorability was partially offset by soft top line sales number.

Let's talk for a couple of minutes on the gross profit dollars. As Julian mentioned, our gross profit dollars were down with the decline in comp store sales and to a lesser extent fewer overall stores. That was partially offset by our continued improvement in our gross margin rate. Where for the fourth quarter you saw our gross margin rate at 44.8%, and that’s a 90 basis point improvement versus prior year, keeping in mind that that prior year number was a very healthy increase versus 2005. And so from a gross margin rate, it was a very nice two-year increase.

We've continued to focus. I think our gross margin rate is not a result of significant category assortment changes; it's more a result of some of our specific operating improvements, a couple of those being inventory management and also a more effective promotional spend.

On the inventory management side, that has helped us to achieve a couple of outcomes. First, more productive markdown management, and what I'm talking about is, as we transition product, not only seasonal product but also line or assortment changes, it's allowed us to reduce and have more productive markdown spending.

That’s also helped us with our end of life or discontinued merchandize, where at the end of 2007 we see an over 40% reduction in our discontinued end of life merchandize. So, as a result of both of those, where you see us exiting the year, exiting the fourth quarter, it's not only with less overall inventory, but very importantly a much higher quality of inventory.

So what does this mean from a gross margin rate perspective? When you look at our individual skews, at our individual categories, it's an improvement across the board on many of our gross margin rates. Now these individual category gross margin rates are being partially offset by an unfavorable sales mix, and I'll get a little bit into that as we talk about our sales.

For the fourth quarter, our comp store sales were down 6.7%, total sales were $1.364 billion, that's down $94 million versus prior year. One comment I'll make on that is even within some of the competitive environment and some of the macroeconomic conditions I talked about, it's a slight improvement versus our year-to-date trend. For the year, we see comp store sales at negative 8.2%, and sales of $4.252 billion, which is down $526 million.

Dragging the sales number, our largest issue has continued to be in the fourth quarter as it was to the first three quarters, and that's our postpaid wireless business. We also did a lesser extent saw-soft performance in our satellite radio business. Fourth quarter saw a soft performance in our MP3 that was not consistent with the first three quarters.

And then we made a conscious decision on our large screen flat television sets to reduce not only the assortment, but also the store count that you see the expanded assortment, and so that had a negative impact in the fourth quarter on our top line sales. But when we looked at that, those were unproductive and unprofitable sales.

All of these categories were partially offset by strong performance in categories such as GPS, video gaming and within our accessories business, our media storage. So as you think about those categories that are driving strong sales performance, GPS, video gaming and media storage all of those have one characteristic, which is their gross margin rates being under our corporate average. So, that’s helping to drive that unfavorable margin mix between the categories that I referred to earlier.

Let me talk for a second about the postpaid wireless business, because this has continued to be our number one issue from top line sales, and let me help you quantify this. Within postpaid our largest shortfall continues to be the Sprint business. And in fact, if you look at that Sprint postpaid wireless business, and if you combine that with the related accessories business, that alone results in 80% of our overall sales decline.

Then furthermore, if you add to that the television and the large flat screen TV business that I referenced, these two categories alone make up 100% of our sales shortfall. So, said another way, all of the remaining categories for the fourth quarter traded flat last year. So within that flat performance, there were several categories that had very strong quarters, I'll mention a few of them.

Firstly in the GPS business: GPS continues to drive strong triple-digit growth. We've continued to look for ways to expand not only the assortment, but also the number of storage for carrying that expanded assortment.

Within the accessory category, the media storage continues to drive double-digit growth. And then our video gaming business, we did some initial testing with the video gaming in third and fourth quarter, which you will see from us in 2008 as expanded assortment in an expanded number of stores. Whereby by the end of 2008, you will see a core assortment in over 4000 of our stores and you'll see an expanded assortment in over half of our stores.

I think when you look at all four quarters, we obviously had a focus on improving our overall profitability and a big piece of that, as Julian mentioned, was on our operating expenses.

When you look at the fourth quarter, our operating expenses were down $49 million and that brings the annual total to a reduction of $329 million versus prior year. Even with that decrease that I referenced on comp store sales, our SG&A ratio to sales went from 31.6% in the fourth quarter 2006, down to 30.9% in the fourth quarter of 2007.

The reduction was really a result of our daily disciplined attacking our SG&A expense across every line item. The largest line item on our expense continues to be payroll. You see significant reductions there, not only from our headcount reductions at headquarters, but also out in the stores where we continue to look at our labor scheduling and our efficiencies and trying to maximize those efficiencies at store level.

From a net interest perspective, you saw our net interest decreased from $7.5 million to $3.1 million in 2007. That comes from not only an improvement in interest income, but a reduction in our interest expense.

On the interest income, as a result of our improved operating performance and our improved working capital management, we saw throughout the year a higher cash balance which helped to drive that higher interest income. From an interest expense during September of 2007, we repaid $150 million of bonds, which helped to drive that interest expense down for the fourth quarter.

I would like to spend a couple of minutes on the balance sheet and cash flow and then I will turn it over to Peter for his comments. I would say that throughout the year, you saw an improvement in our balance sheet quarter-by-quarter and the fourth quarter was no different.

As we previously discussed our inventory management, we continue to focus there, a couple of results there has been. I mentioned the higher quality of inventory, and you see the overall inventory being reduced by $47 million, at the same time, a slight increase in the accounts payable. With that reduction in end of life, that means a lower net interest amount, but also a much higher quality of inventory at the end of the year.

The only call-out on the liability side, as I mentioned, is if you see the short-term liability reduction being driven by the $150 million of repayment from the bonds in September.

The net result of all this improved operating performance and they improved working capital management. You see our cash increasing to $510 million from $472 million. So, on the surface, it was a $38 million improvement. But please note that that not only do you have the $150 million of bond repayment, but also $209 million of share repurchases during the year. So if you adjust for those two, it would have driven almost $400 million in increase in cash year-over-year.

And the final call-out I will make is, as a result of all these improvements, we are again able to operate this company through our peak inventory build, without the need for any borrowings under our credit facility.

So with that, that concludes all my prepared remarks on the financial statement and I will turn it over to Peter Whitsett, our EVP Chief Merchant.

Peter Whitsett

Thanks, Jim, and good morning. As Julian and Jim have mentioned, I have recently joined the organization and I am excited to share my comments about a few key opportunity areas mentioned this morning.

First, in the area of our in-store experience, as Julian mentioned, we implemented a field organization designed to get us closer to our customers and the associates who are serving and solving problems for our customers.

This organization has allowed us to begin to tailor our assortments and offerings to additional customer segments that were previously underserved. For example, we've recently implemented several state-specific programs related to the legislative change regarding the hands-free initiative. This initiative allows us to use local knowledge from our field organization to advise, and in part, direct the central support organization to deliver a superior experience for our customers.

We are also exploring other avenues to enhance the presentation of our brand. This may come in many forms, including our in-store signage, our product packaging, and customer product interaction within our stores, for example live display units.

Bryan will be addressing our visual merchandising opportunities in greater detail.

Next is our opportunity to grow our gross profit dollars. This list is by no means exhaustive but a framework and process for us to achieve higher levels of profitability.

First is pricing: This is not our initial price, but the realized value and profit from improvement in our average selling price or ASPs. Pricing improvements are focused on our two largest markdown areas; promotional and clearance transactions.

As we further develop our analytical capability around the value, service and pricing relationships, we would expect to continue to see improvements in this area. For example, our clearance markdowns will be implemented by store cluster, so that stores with low inventory and high weeks of supply will receive a different markdown depth, and potentially different markdown timing than stores with greater inventory or greater weeks of supply. This will allow us to improve both our sales and our profitability to an improved realized price.

Acquisition cost is our next focused initiative. A continued development of our global sourcing initiatives will lead to an expansion of our private label programs and a disciplined approach to negotiations using competitive auctions, accelerated line reviews, and strategic supplier partnerships.

My early assessment is that this is an area for improvement. We are currently evaluating provided capability and plan to roll out a formal process in the second quarter of this year.

Last here, I'd like to discuss is our commitment to growing and developing a more robust private label business. We have a strong heritage and competency in this area, as the company has consistently delivered high quality merchandise under the RadioShack, Gigaware, Presidian and Accurian brands. We believe there is significant potential in our private label business. As a result, we are actively increasing our Gigaware offering to include both the MP3 accessory category and the gaming accessory category. This change will allow us to offer more consistent and comprehensive brand presence within the store and online environments.

As I mentioned earlier, I am thrilled to have joined the team and look forward to updating you in the future. I'd now like to introduce to the call Mr. Bryan Bevin, our EVP of Store Operations. Bryan?

Bryan Bevin

Thanks, Peter, and good morning, everyone. Now clearly, many of you know that I recently joined the RadioShack Corporation, actually in the first week of January. I must say that I'm both excited and encouraged by the energy level that I've found in the business. As Julian said, I do believe that we have maybe a significant number of opportunities to take advantage of from an operational perspective. Now most of the opportunities that I'll talk of revolve around performance management, execution, and of course, operational discipline.

The first opportunity that I think you can take advantage of is around better performance management. We found couple of guys focused on key metrics and really improve the visibility of performance, pretty much at all levels in the field organization. And at the same time, we've intensified the focus around productivity down to a very local level. Linked to that, we've established very clear expectations around those metrics and performances and defined pretty much for every stakeholder what a clear picture of success looks like.

Now somewhat of an obvious statement, but a huge part of driving the business and realizing the potential will only be delivered if we appropriately support the front-end of the business in order to maximize the traffic flow that we currently enjoy, and bring more relevance to the RadioShack brand. In support of this effort, we've established a far more cohesive cross-functional review on a weekly basis, to identify blockages and barriers both nationally and at local levels, focused on market segments and demographic segments and then share those best practices and leverage them across the entire network.

I have to say, since the start of those cross-functional reviews, things like response time to issues relating to customer experience, supply chain issues, pricing and marketing opportunities has been reduced dramatically. We've now started to see some positive results as a consequence, so that I have to say -- should caution that we're still in the early days of that.

The next area of opportunity that's obvious to me is our conversion rate. We currently enjoy significant traffic-flow that was failing to convert to sales. And in many respects it's kind of a nice problem to have, because we are already seeing customers come through the door. But, we now need to do more to turn those visits into sales, gross profit dollars, and of course satisfied customers.

One initiative that we'll be putting into place to address this conversion is far more surgical scheduling and resource planning efforts. And in layman's terms, what that means is more appropriate staffing levels scheduled to cover peak trading times, again with the skills to turn those visits into sales. We'll also focus more discipline around stock positions or replenishment cycles, which will help significantly, especially when you look at self-select transaction times.

Linked to that, we intend to de-clutter the stores from a messaging standpoint. We will simplify the visual merchandizing from messaging assortment, adjacencies, and what we think we'll see is significant benefits in helping the customers more effectively self-navigate the store. And we think that will be particularly true around wireless accessories, parts and pieces and other peripheral products.

We also intend to simplify the store and our wireless world by bringing products and office to life through simpler graphics, clearer propositions, along with far more education and training for our employees; certainly around applications, services and content packages.

Now, many of the initiatives that I've described revolve around discipline and diligence, in addition to a far more cohesive approach for many of the functions around the business; not least of which is the commitment to the merchant group and the initiatives that Pete has already discussed.

Now, I am once again to tell you that I'm delighted to be part of the team, and I feel very positive about the possibilities that we have. Now I'd like to turn the call back over to Julian.

Julian Day

Okay. Thanks, Bryan. I appreciate it. So, in summary, I'm going to try and summarize here for just a minute. In summary, obviously I can tell you that overall we're very pleased with our earnings progress last year, culminating as you all know net income of $1.74 per share for the year. And for 2008, we plan to make more progress in each of the priority areas that I discussed earlier on in this call.

On improving our in-store experience, you just heard from Bryan and Peter on some of the major elements of our approach, which we are very confident in expecting that they will produce further benefits in 2008. We made many improvements last year, but I believe that in the stores under Bryan's leadership, we can confidently expect that the pace of the improvements will continue to quicken.

Second goal: Peter talked about this, in increasing gross profit dollars. As I noted earlier, the quality of our inventory is much more improved over last year, and we believe, therefore, that we are much better positioned for success here than last year, with the unknown and caveat obviously being the current state of the economy and how the economy turns out for the year.

Our third goal is to continue to aggressively manage all expenses. On the topic of cost-reduction, obviously we made a lot of progress over the last year. I noted elsewhere, and in contrast to last year, that I believe the bulk of our improvement opportunity in 2008 as a business lies in the areas of revenue and margin growth, driven largely by initiatives under the control of both Bryan and Peter. But I want you to know, we are still very focused on cost and we are going to continue to aggressively seek out costs controlling reduction opportunities in 2008.

An example of this, for instance, would be in our transport and distribution area, where we have recently done two things. One is we've recently negotiated substantial rate reductions in transportation. The second is that we recently took the decision to close our Columbus distribution center.

And just to give you a sense in Columbus alone, we expect to save approximately $4 million in costs annually, of which we will see about half of that, or $2 million in 2008.

Additionally, owing to the fact that we will have few inventories staging points, we expect to be able to reduce inventories as a result of this move by approximately $20 million.

The fourth goal is around capital allocation. I would say here, and said some of this earlier, that our increased confidence in the quality of our operations has led us to plan on allocating more capital to the maintenance and development of our business. This is going to take the form of an increased pace of maintenance in our portfolio of stores, and it is also going to reflect our current effort to refine and improve our cost store format to bring a more contemporary look and feel to our stores, and hence to our brand.

Last year we spent some $45 million in capital. Therefore, in 2008 we expect to roughly double that to between $80 million to $100 million, depending on timing during the year.

So I hope that introduction was helpful to you and what I will now do is hand the call back over to the operator who is going to invite a few questions from you.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Matthew Fassler with Goldman Sachs.

Robert Higginbotham - Goldman Sachs

Hi, it's actually Robert Higginbotham for Matt. I would like to talk about video games for a minute, if we could. I mean, could you give us some more color about what the expanded assortment will look like relative to what you currently have in the stores now? And related to that, I suppose that eventually the assortment would cover all the current platforms. Could you give us a sense of when you think you'll have access to products that are currently in short supply?

Peter Whitsett

This is Peter. I will answer the question and look to my colleague here to fill in. We have always had a very good accessory business and as I mentioned around our private label and our expansion of our accessory business into the gaming category, a lot of the gaming categories would come under our brand and we'd be sourcing those. We certainly had some good success as Jim mentioned in the fourth quarter with a lot of the hardware components of the gaming business.

And as that product supply has continued to open up in some of the areas, we're continuing to flow those out to Jim's point to a greater number of stores and into a greater assortment. I think there is still some uncertainty about few of the platforms in general, but as we were getting more inventory to Jim's point we are rolling that out through a greater number of stores.

Bryan Bevin

And I think what you saw in last year to your point is we were a little bit challenged in our access to some of the inventory that was tight, partly because of one we made the decision to get in to video gaming. So, obviously this year with better planning our front end would be our intention that the availability to that inventory would be better in '08 than what you saw from our stores in '07.

Julian Day

Yeah. And Rob, I would only add to that that I think, as you know we did a very soft launch entrance into this category, so we could test our way in to it last year. And obviously that the fact we haven't been in it previously and did a soft launch, I think we meant that some of the vendors were sort of unsure as to what our overall plans were there given the product was in short supply, were in some cases reluctant to commit to us without knowing what our plans for the business overall were.

Now, having heard what we have said about our plans for this next year for the business, I am very confident that we are going to be able to get access to any products set that we need on sort of level playing field.

Robert Higginbotham - Goldman Sachs

Understood. And by a quick way a follow-up, I mean would you characterize the expanded assortment as something like roughly kind of double what you are carrying now. I don't know if that's a fair way to think about it? And then ultimately what kind of percent of sales of your total business could you envision this becoming?

Peter Whitsett

Yes. This is Peter, again. Certainly from a size or breadth of the assortment, I would say to that 40% to 50% increase and space is an appropriate way to look at it. As far as our balance of sale, it's probably too early, I guess, for me to probably comment on that as that business is still relatively new to the assortment. So, as we attract customers into that line of business, I think we'll have a better idea where we think that balance of sale would land.

Robert Higginbotham - Goldman Sachs

Great. Thanks very much.

Julian Day

Okay.

Operator

We'll take our next question from Scott Ciccarelli with RBC Capital Markets.

Scott Ciccarelli - RBC Capital Markets

Hey guys, how are you?

Julian Day

Good.

Scott Ciccarelli - RBC Capital Markets

Good, I had another question on the wireless side. You guys have highlighted the sales softness in the Sprint postpaid business. I was wondering if you could give us any color on the AT&T business, which we all know got off to a bit of a rocky start. As well as the impact from prepaid and what kind of impact that has had on the total wireless business? Thanks.

Julian Day

Yeah, I will kick this off and maybe ask Jim to give you a little more detail. But first off Scott let me just confirm that you are absolutely right in the sense that a year ago, we were very concerned about the then Cingular and now AT&T business, that during the year has steadily improved and I would say currently in my mind, I view that business as operating well.

So on the overall, I would say we're very happy not just with the relationship there and we're, but also with the quality of the working partnership there, which has steadily and greatly improved during the year. So Jim, I don't know if there is anything you want to add to that?

Jim Gooch

I'll just add that to your point throughout the year, the AT&T business even though we're struggling at times, both continued to really outperform that Sprint business. And we've seen that continue into 2008 with signs of that AT&T business actually showing the ability to grow on year-over-year. So if you think about where we are at in that life cycle, we're into the third year now. So we are getting around the horn on some of the upgrade business where the folks would have originally signed up for their product.

And then on the prepaid side, we've continued to show strong growth there, continued to grow, I think barely close enough to allow the industry averages and so we still feel and maybe Bryan can touch on this, where we have opportunity in that business, to continue to be strong month-after-month, quarter-after-quarter.

Bryan Bevin

Yeah, Jim this is Bryan, what I'd say is that we're starting to build a little bit more confidence about our wireless business, and when we look at AT&T and Sprint, and some of the other MVNOs that we carry, we are going to be a little bit more bold in certain handset ranges getting to some of the higher end devices that we can attach higher rate plans and data plans and all that comes up. So we still think there is significant room for us, both from a growth perspective and the confidence building in the stores and attracting different customer profiles. So we see that as a good area for us going forward.

Scott Ciccarelli - RBC Capital Markets

I guess I was looking for any kind of cannibalization you think about the business; because obviously we've seen more of a migration towards prepaid over the last couple of years as kind of an industrywide phenomenon. Is there a way to kind of quantify what the cannibalization is there or we're just seeing strong growth from prepaid, you really haven't put that way. Thanks.

Bryan Bevin

This is Bryan again. Let me tell you that I think we’ve still got headroom in postpaid devices. The guys are responding well to the additional training that we put in place recently and the prepaid market is really opening up a different customer segments to us. So if you look at the targeting from networks around youth, Hispanic, gifting those kind of things, I think there is room for both to grow.

Scott Cicarelli - RBC Capital Markets

Great. Thanks a lot guys.

Julian Day

Thanks, Scott.

Operator

We'll take our next question from Gary Balter with Credit Suisse.

Seth Sigman - Credit Suisse

Hey this actually Seth Sigman in for Gary. Gary was a little nervous to get on the call after the (inaudible).

Julian Day

Nicely referenced.

Seth Sigman - Credit Suisse

Anyway. We were open just to get a little bit more color on your product outlook for 2008. Any key products that you're really excited about, maybe iPhone or anything around that? And then just a quick second question, as we think about your store base, how should we think about store growth or future closures possibly how are you guys thinking about that at this stage?

Julian Day

Let me kick that off and then -- certainly I can defer to Peter on product. But I would say in general, as most retailers were not so particularly anxious to share publicly, what our detailed product plans are. Obviously Peter already referenced our goal of expanding some of our own private label brands, notably Gigaware. But I will say this that our goal having got a business model last year that we sort of wiped and looked off and which works for us from a profitability point of view.

As I mentioned earlier, our goal this year is to increase profitable throughput through that business system. And therefore it would certainly be fair to assume, I think Seth, as you are doing, that we're going to aggressively look for surprising and delighting new products to increase the attractiveness of the assortment in our stores and therefore that goes to our brands. So, Peter, I don’t know if you want to?

Peter Whitsett

I would just add Jim had mentioned that we did have some nice success in some of the other categories in the fourth quarter, particularly GPS, gaming and media storage. and I think, kind of back to my comments earlier and Julian's point around our commitment to private label; it's going to be really key for us to continue to kind of drive that private label positioning within our assortment to ensure that we can achieve the margin in the business model that Julian referenced.

Jim Gooch

And as far as your comment on change in store count; we definitely have no current plans for a significant change in store count either up or down, I think as Brian's team gets in and improves the core operations of many of our stores, our hope would be especially some of the underperforming stores will see an improvement in profitability.

What you will see and I think some of those numbers that Julian quoted on our increase in capital spending is maybe an increased focus on some of our relos, capitalizing on where we do have opportunities for some of the new stores, as some of the population shifts happen and that will probably be more or less offset by the onesie twosies store closures as leases come up, and as population has shifted or as stores are underperforming.

Seth Sigman - Credit Suisse

Okay. Great, thanks. Good luck to you guys.

Jim Gooch

Thank you.

Operator

We'll take our next question from Danielle Fox with Merrill Lynch.

Irena Golub - Merrill Lynch

Hi. This is actual [Irena Golub] for Daniel.

Julian Day

Okay.

Irena Golub - Merrill Lynch

I just have a follow up on the wireless. As you know, Sprint is closing down some of its carrier stores. What do you think the implications are for RadioShack? Is this an opportunity to drive some additional wireless sales?

Julian Day

Obviously everybody knows that Sprint very recently had a pretty significant management change, both at the very apex of the organization and then down through the pyramid. And obviously that has already brought with it a number of announcements and I would expect in general that as Dan Hesse continues to spend time evaluating his business that may well lead to other changes.

Early on I would say I have certainly been impressed by the extent to which that new management team has illustrated its determination to really get to grips with the issues that business faces. And I think what we will do is, we will continue to seek ways to partner with the Sprint organization that will benefit both sides so that's really what I'd say. I don't know whether anybody else here has anything really to add to that. Obviously that organization is in a state of change, and I think all of us from different directions just have to keep a very close watch on what opportunities that offers.

Irena Golub - Merrill Lynch

Okay, thanks. And just to follow-up, do you plan for more share buybacks for 2008?

Jim Gooch

Hard to tell you that one, there is no current plan to do any share repurchases. Obviously the result of that and I think you see that is increasing in our cash balance on the balance sheet. I think what that does is it just continues to give us greater flexibility as we go forward, not only as Julian mentioned again investing the core business with increased capital spending, but also there is a possibility of investing outside the core business especially as any assets might become slightly more affordable there. So, as our performance improves that this is going to increase our flexibility on both fronts.

Irena Golub - Merrill Lynch

Okay, great, thank you very much.

Julian Day

Thank you.

Operator

We’ll take our next question from [Adam Syndler with Deutsche Bank].

Adam Syndler - Deutsche Bank

Hi yes, good morning this is Adam Syndler for Mike Baker. Two questions first on the flat panel. When you’re saying that you're reducing your assortment and possibly the number of stores as well, do you think that was possibly due to the assortment of flat panels that you had or just that was not working very well in your stores, or is it possibly even which stores they are in?

Peter Whitsett

This is Peter, I would say that from my perspective as you looked at the flat panel business in 2007 there were issues with the assortment as well as issues with the number of stores that it went in, as well as kind of the logistics of handling that size of a unit through our supply chain. So as we are looking at that business and creating new business models potentially for the flat panel business, I think it will be incumbent upon us to look to more kind of the in and out and surprising our customers as they come in to our stores and find tier-1, tier-2 brands at very reasonable pricing to really create a environment in which we can sell the corresponding accessories and other things having to do with the high definition environment.

Julian Day

I would say just philosophically Adam, if this is helpful, but in general we have come to think that one of our competitive advantages as both Jim and Peter have referenced is our ability to manage both product assortment and inventory in such a way as to maximize profitability. Which means that a) broadly speaking are going to want to choose to compete in areas of the consumer electronics industry that did not become sort of a massive price battlefield. So that's number 1 and number 2 as Peter referenced want to ensure that when we put inventory in place we can make changes to the placing of that inventory at a cost that makes the bottom line make sense for us. So both of those things, I think, philosophically have caused us to, as Peter said, make a decision in general to focus on smaller screen flat panel and to the extent that we have the opportunity to be sort of in and out on other products rather than necessarily commit to them in the long-term.

Adam Syndler - Deutsche Bank

Go it, thank you. And then, Jim, just a quick follow-up. When you were talking about the low conversion rates being an area of opportunity for 2008 with better scheduling, is it possible that perhaps you discussed earlier cutting back on payroll and you perhaps maybe cut back too much or do you think that you could use either one just better data from this year or secondly more of a part time labor for us at the end of that?

Bryan Bevin

Yeah, this is Bryan. Let me just address that. I don’t think the overall labor number was a problem, I think what we've done is failed to use the available resource that we had surgically as we could have done. We now have a pretty robust labor management tool, and what we've got to do is use that, looking at traffic, available talent that we have got and match the two things and then be disciplined about how we executes it. So, I don't anticipate that we'll need to spend more labor; I think we just need to spend the labor that we have got more intelligently and candidly.

Since I've been here in January, I've been encouraging people to really get to grips with understanding who they've got in their stores, the skills that they have and really help match those things to, either high traffic or non-customer facing task as the shift dictates. So, we'll make more progress on that, but I don't anticipate that we'll be spending on labor.

Adam Syndler - Deutsche Bank

Okay. I appreciate it.

Operator

We'll take our next question from Jeff Feinberg with JLF Asset Management

Jeff Feinberg - JLF Asset Management

Good morning, congratulations on the progress that you are making. Can you give us some sense from a quantitative perspective, perhaps when you would hope to achieve flat same store sales as a result of all the very insightful and smart initiatives that you have, just so we can have some sense in terms of the progress of that overall reasonable time period?

Julian Day

Yeah Jeff, I think we can try and give you a sense for that, and I think probably I'll ask Jim to talk to that. The only caveat that I obviously feel obliged to offer is that the economy is currently begun to us and everybody from Bernanke on down I think. And so, I'd ask that you and others interpret our comments against that background, if you understand what I am trying to say.

Jim Gooch

I will give you a little bit of color as to where we've been trading. January was a soft month for us, I think that looks to be consistent with a lot of our competitors. What I'd say is we're fairly happy with where February has traded. I gave you a little bit with Sprint and the televisions, if you just take a look at January and so if you pull out the Sprint and corresponding accessory for the February business, the remaining categories are trading positive in low single digit. So we need to make some progress on that Sprint, we need to make some progress on that wireless, we are seeing the remaining categories continuing to improve even versus that of our fourth quarter trend.

Julian Day

So Jeff, what I would say is, you are correct, I think, in your question in identifying that as a significant goal for us as Jim just said, this month we're already more than achieving that goal other than in our Sprint business and I would simply offer that a year ago we were wringing our hands about the state of our postpaid business on the AT&T side that has been energetically addressed and fixed during the year and we’re going to bring that same energy and focus to our relationship with Sprint during this year.

Jeff Feinberg - JLF Asset Management

And just could I have some perspective, because in the fourth quarter if I understood right the commentary correctly the same-store sales are down 6.7 and most of that was due to Sprint. If I understood correctly, excluding that we were flat. So if it's possible just to get a sense in aggregate where we’re in February because I don’t how much the Sprint can drag us?

Julian Day

Let me begin, if I might, to slightly correct the impression that you gathered. I think what we intended to say was that in the fourth quarter approximately 80% as I recall. Jim --

Jim Gooch

Yes.

Julian Day

Of the negative same-store sales were as a result of Sprint postpaid and its related accessory business. So, we did not intend to say that, but for that we would have been flat. Jim?

Jim Gooch

In the fourth quarter if you add in the television with that Sprint and corresponding accessories, we are flat. The Sprint and the accessories, as Julian, mentioned represent 80% of the decline, while in February that has improved and the rest of the business has improved, where if we just take out that Sprint and corresponding accessory business, we are actually trading at low single digits. We are not on the call to give overall monthly numbers, but I want to give you some sense on where the majority of our categories were trading.

Jeff Feinberg - JLF Asset Management

Sure. And the question wasn't at all how you're doing this quarter, as much for trying to understand over time given the entire mix of goods, because I know you're evolving the mix as you have talked intelligently about today. So I was just more focused trying to think on a aggregate consolidated basis, not excluding various categories, but aggregate, one we might hope to as a result of various initiatives get to flat or positive comps?

Julian Day

I think I concluded earlier by saying this, Jeff. We've obviously tried to share with you as much as we think we can, given that as Jim noted, we don't share monthly sales. As you've heard from us, so if you will, sort of sole remaining barrier is making sure that we fix the Sprint and assorted accessory business, and we are working very hard to do that and will get to flat overall absolutely as quickly as we're able to and we very much hope to do that this year. But that’s pretty much all I can really honestly tell you.

Jeff Feinberg - JLF Asset Management

Okay. One last one, perhaps just to understand what are the types of initiatives that are available to you to fix Sprint, just so I can understand the opportunities set there?

Bryan Bevin

This is Bryan. We got clearly the same challenges as other Sprint reseller. But from our perspective we think there’s room inside of the way that we deal with what’s available to us and we think that we have the opportunity to outperform where Sprint performs in the marketplace. So that’s going to be part of the issue. And then, we'll of course partner extremely closer with Sprint as they build that customer service reputation back and take any of the initiatives that we feel will benefit the business that they offer to us as a partner. So two elements really, we'll progress in the rate that Sprint progresses, but we think we have the ability, just from an executional standpoint to outperform that pace.

Jeff Feinberg - JLF Asset Management

Wonderful. Thank you

Julian Day

Thanks, Jeff.

Operator

We'll now take our final question from Gregory Melich with Morgan Stanley.

Gregory Melich - Morgan Stanley

Hi thanks, guys. I have a question on the rebuilding the residual payments. Couple of years ago, when you left Verizon, you had to walk away from those and then there were couple of years into the AT&T relationship. How have the residuals been rebuilding with AT&T and give us a percentage of where you were with Verizon however you want to look at it and how should we think about progressing into 2008 and '09?

Jim Gooch

I don’t think I am going to get in to give any specific numbers. But I guess that what I will share with you is, we've started to see the growth in the AT&T business, and so as I mentioned, especially as you start to get around the horn and start to sign up these people and get a couple of peers into that agreement. Unfortunately right now that's being offset by some of the declines we are seeing in the Sprint business.

One thing I will correct you on a little bit is within the contract. There are some offsets that we are getting, not only on the postpaid, but also on the prepaid business, that's also contributing to that. So, our hope would be as we continue to see some of the turnaround in the AT&T and start to see the growth in the AT&T that in the short-term the AT&T growth would offset any of the negatives on the Sprint side and then, with any improvements on the Sprint side, you hopefully start to see an overall growth in our residual things.

Gregory Melich - Morgan Stanley

So, as I see it, looking at it holistically, when you start talking about having margins potentially up this New Year, are you assuming that the AT&T relationship is benefiting that this year versus last year?

Jim Gooch

That's correct.

Gregory Melich - Morgan Stanley

Okay, thanks.

Julian Day

Thanks, Greg.

Jim Gooch

You are welcome.

Operator

And that concludes the Q&A portion of the call. Please continue with any closing remarks.

Julian Day

Alright, well thank you all very much again for taking the time to join us here today on the call. Hopefully, our (inaudible) comments were helpful to you in understanding the business and hopefully you feel that the questions were to the point and that the answers were equally. So again, thank you all very much for joining us. Those of you who have other or follow-up questions, I know will have the opportunity to call Martin during the balance of the day and Martin will be around to help you with anything you need. Thank you all again very much.

Operator

Thank you for your participation. This concludes our conference call. You may now disconnect.

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Source: RadioShack Corp. Q4 2007 Earnings Call Transcript
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