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RadioShack Corporation (NYSE:RSH)

Q2 2012 Results Earnings Call

July 25, 2012 9:00 AM ET

Executives

Jim Gooch – President and CEO

Dorvin Livley – Executive Vice President, CFO and CAO

Bruce Bishop – Investor Relations

Analysts

Matthew Fassler – Goldman Sachs

Greg Melich – ISI Group

Chris Horvers – JP Morgan

Brian Nagel – Oppenheimer

Trent Porter – Guggenheim Securities

Jeff Kobylarz – Stone Harbor Investment

Brad Thomas – KeyBanc Capital

Michael Lasser – UBS

David Gober – Morgan Stanley

Operator

Good day, ladies and gentlemen. And welcome to the RadioShack Corp. Second Quarter 2012 earnings conference call. My name is Pam and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Bruce Bishop, Vice President of Investor Relations for RadioShack Corp. Please proceed.

Bruce Bishop

Thank you, Pamela. Good morning everyone and welcome to RadioShack second quarter 2012 investor call and webcast. With me today on the call are Jim Gooch, President and Chief Executive Officer; and Dorvin Lively, our Executive Vice President, Chief Financial Officer and Chief Administrative Officer.

Just to note, we filed our 10-Q with the SEC earlier this morning. Our earnings release and the 10-Q filing, along with the replay of this webcast are available on our IR website. I will remind everyone that we may make forward-looking statements on the call today, either in our prepared remarks, or in the associated question-answer-session. These statements may include words like expect, believe, anticipate, or words with similar meaning, and are based on our beliefs and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risks are detailed in our SEC filings, including our 10-K and 10-Q, as well as our news release and other communication. The company does not undertake to update or revise any forward-looking statements, which speak only as to the time they are made. We also may refer to free cash flow in our discussion today. Our definition of free cash flow is operating cash flows minus capital expenditures and dividends, please see our Form 10-Q for a full description and a reconciliation of the cash flow.

Finally, following our prepared remarks today, we will have a question-and-answer session. Please limit yourself to one question and one follow-up, so that we may get to everyone's question during this call. Feel free to requeue if you have any additional questions. Members of the media are participating in the call on a listen-only basis, and should contact us directly 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, Bruce and good morning everybody. Thank you for joining our call today. I'd like to cover a few items today, including the performance of our business in the quarter, the progress we are making on our key initiatives, and what's our near term outlook. But I'd like to share with you first, what our thinking is on our capital structure, even though our profitability has been below our expectations, we continue to maintain a very strong balance sheet. We currently have $580 million of cash, and total liquidity over $900 million. This gives us some flexibility, as we plan for the $375 million of debt that's coming due, next year.

If you look at our current debt-to-equity ratio, we generally have been around 100%. However, as we move through 2012 and we reflect on not only the state of the overall economy, but more specifically, as we take a look at the state of the CE industry, we believe we should lower that ratio.

After careful consideration, we are making a couple of changes to our capital strategy. First, we will look to refinance approximately half of the upcoming 2013 debt maturity. We believe we will have more than ample options to refinance this amount over the next several months.

Next, we will be suspending the dividend. This allows us to increase the amount of excess cash flow used to pay down the debt, continue to invest in improving the business, and ensure that we maintain our strong balance sheet. As we continue to take actions to improve the business, we believe this approach will drive the best long term outcome for our shareholders.

So with that, let me move over to the performance for the quarter, as I said the profitability was below our expectations. Gross margin was a significant issue, largely driven by the profitability in our Mobility business.

While we are pleased with the sales increases in Mobility, our margins still remained under pressure. On what we have talked about, I think on prior calls, including the higher mix of smartphones, in particular, iPhones, and also the mix impact of the significant growth in our Target business. As you all know, our business at Target Mobile centers, it's primarily the postpaid phones and that carries a lower gross margin than our corporate average.

We expect that smartphone growth in the mix is going to continue to impact into our third quarter, and to a lesser extent, the fourth quarter results, as we anniversary the iPhone expansion to all three carriers from last year, and the launch of the 4S in the fourth quarter of last year.

One other insight on our gross margin performance, if you look at our gross margin rate for our total business, if you exclude the postpaid wireless, our rate was roughly flat. So let me say that another way, if you look at our prepaid wireless, our tablets, our signature business, and our CE business, and if you combine all those businesses, the gross margin rate was flat, year-over-year.

As we stated over the last couple of quarters, some of our strategic initiatives are designed at driving improvements in higher margin categories, and I would say that based on these results, we are starting to see some of the traction in the margin trends in the non-wireless categories.

Now, let's move beyond gross margin. There were a couple of noteworthy positive items for the quarter. We generated overall sales growth of just over 1% for the quarter. Probably more importantly though, our comp store sales growth improved in the second half for the quarter, where increases in May and June more than offset decreases in April, which were in large part driven by the shift in Easter.

Looking more closely, the sales performance, our Mobility business in our U.S. company operated stores, if you combine that with our Target Mobile centers, we generated approximately 11% sales growth, and in our high margin signature business, we continue to show improvement, generating positive sales for the third consecutive quarter.

Overall, we believe we are making progress in driving sales growth in a very challenging industry, while we continue our focus on improving the profitability of each platform, and aggressively manage our SG&A expense.

Now let me turn to some of our strategic initiatives. First, we have a significant brand refresh underway, which will help contemporize our brand, and raise consumer awareness of our Mobility business. This work is being supported by our new ad agency, Grey New York and the Lippincott Group, both of which have great track records of success in the retail industry.

We believe we can better leverage our high unaided brand awareness by having a clear brand message, with more effective advertising strategies. In simple terms, we need to rebuild the consumer's knowledge of our brand, helping to better communicate the breadth of products and services we offer. We need to do a better job telling customers all of the positives they will find, when they visit our store.

We are also investing more in training of our store associates. We believe this will dramatically improve the customer's in-store experience. Mobility transactions, as we have talked about before, it's a very complicated transaction with a range of handsets, service providers and rate plans, all of which is only increasing with some of the more recent changes to the data plans.

This improved service, combined with more tools to engage the customer such as our low price guarantee, our free mobile support, our Trade & Save program, and our recent $5 upgrade check offer, will allow us to raise the bar in our customer service and improve the conversion and improve our market basket.

Second, as I mentioned earlier, we continue to be focused on improving our gross margin rates across our entire business. In the Mobility platform, we are looking to leverage the emerging trends towards the prepaid wireless plans, with the most recent launch of no-contract iPhones with Virgin Mobile.

While there is a high upfront cost to cover the handset for the new iPhone, the monthly rates are much lower, and there is no contract or breakage fee for the customer, and this actually caters to a wider audience than you might expect, including the folks who are credit-challenged with the postpaid offers, but also stronger credit customers who don't want a high monthly cost, or are looking to avoid the commitment associated with that breakage fee.

Also with the quality of our store associates continuing to improve, we believe we can improve our accessory attach rates that we have talked about before. For example, we already skew higher than average on the Apple care sales, for Apple products we sell, and we have also improved our merchandizing, wireless accessories and are providing customers with a wider selection of options that we can attach to our wireless handset purchases.

Next, we continue to invest in our longer term growth initiatives. Let me touch on a couple of those, including our OmniChannel, and our opportunities for international growth. First with OmniChannel, in the OmniChannel strategy, we are building a long term roadmap that's going to allow us to bridge our brick and mortar locations with our digital presence. We are looking to deliver true OmniChannel experience to our customers.

For 2012, we have identified a series of enhancements that we will launch before the holiday to improve both traffic to our websites and conversion. These include our lots checked, store level inventory information and improvements to our checkout process. To further improve our reach with our online shoppers, we also recently launched a store front with eBay, and we will be launching a new mobile app for iPhone and for Android.

On the international side, we are seeing continued strength and growth in our Mexico business, and we also recently announced a Master Franchise Agreement in Southeast Asia, and we have a new joint venture relationship in Mainland China.

In Mexico, we plan to add about 50 new stores this year, growing the store count to 275 by the end of the year. Remember, we said before that over the next three to four years, we see our Mexico operations growing, and we anticipate being 400 to 500 stores.

In Southeast Asia, our first franchise location will open in Malaysia in the third quarter, with our franchise partner, and we have the potential to open over 1,000 stores in 10 countries in the region.

Our newest international partnership is the JV with Hon Hai, which will allow the growth of RadioShack stores in Mainland China, in Taiwan and in Hong Kong. We believe leveraging such a high quality local partner will allow us to overcome some of the unique challenges of entering this market, and in fact, we have already opened the first RadioShack store, it opened in Shanghai in May.

Now let me give you a sense of the pace and the timing of how we expect some of these initiatives to improve our results. We still see challenges in the third quarter. Even though we expect to see the topline sales growth, we will continue to see margin pressure, mainly from the Mobility challenges that we have earlier discussed.

In the fourth quarter, we expect to see greater benefits from some of our initiatives, resulting in top line sales growth, stabilizing our gross margin, and improving our SG&A leverage. We expect these benefits to improve operating profits by $40 million to $50 million in 2013, with a positive trend beginning in the fourth quarter of 2012. Longer term, we'd expect to see the accretive benefits of some of our investments in both our OmniChannel and our international expansion.

So on wrapping up, we have clearly had some short term profitability challenges. But as we look at our business, we see the fundamental competitive strengths and advantages. Advantages around our brand, with our awareness, over 100 years of our heritage around our stores with our small footprint, our number of stores and our convenience of our stores around our real estate, with the short term lease flexibility, and around our products and service, around our Mobility and connectivity products, around our carrier products with the top carriers, the top devices, the same plans, the best prices, and with our well trained staff that supports this high touch, high service sales environment.

Overall, I am confident we can leverage these competitive strengths, and that we have the right strategy and initiative underway to drive stability in the back half of this year, and improve our financial performance going into next year.

So with that now, let me turn it over to Dorvin, and he will get into a greater review on the financial results.

Dorvin Lively

Thanks Jim. Good morning everyone. Since Jim gave you an update on our sales and gross margin, I thought I'd share a few thoughts around three other items. I will give you an update on our Target Mobile center business, a few comments about our SG&A expenses, and then end with some comments regarding our balance sheet position and cash flow.

Jim shared with you the benefit to our top line that our Target Mobile centers generated this quarter. I'd like to add a bit more perspective on what we are doing to make this business more profitable. We have made and are continuing to make operational changes at Target Mobile to increase the productivity in each of these centers and improve the profitability.

Some of these changes include optimizing the labor model for each of these centers, based on the Target Store potential volume, as we look at each of these stores and try to gain some additional labor efficiencies through better allocation of store management.

Some of these includes looking more closely at the peak shopping hours within Target CE department to better align our staffing to these time periods and drive more efficiencies, and additionally, looking at our comps year-over-year, as these stores roll into their second full year of operations.

Additionally, we are working with Target to add prepaid devices along with our current postpaid devices and a few accessories that we currently have to offer the Target guests today. We continue to raise the consumer awareness of our products and services at Target through regular exposure in the Target weekend circular, which really serves as the primary awareness building vehicle for Target Mobile with their guests.

Keep in mind, that the Target Mobile business is still very immature, with approximately 450 of the centers that had not rolled into the comps this past quarter. We ended 2010 with 850 mobile center locations, and only completed the rollout to what's now about 1,500 locations, about this time last year in late July.

While we are not yet achieving the level of profitability we had expected from this relationship to Target, we are working diligently with them on initiatives to drive performance improvement and we expect this business to be profitable by the end of this year.

Now let me make a couple of comments about our SG&A. We continue to aggressively manage our cost structure. Cutting costs where we can, but not sacrificing in some other areas, such as store operations, in particular where it impacts our in-store experience. For example, the increase in training for store associates that Jim briefly touched on a couple of minutes ago, has increased our labor expense. But to offset some of that, we work to reduce other expenses in our corporate SG&A.

Looking ahead, we have definitive plans in place to aggressively manage our corporate structure, and to ensure that we realize year-over-year declines in our core SG&A.

Next, let me share a few thoughts on the balance sheet and cash flow. One item that warrants a little color here is the increase in inventory. This was largely driven by the addition of Verizon, which was lapping the wind down of T-Mobile last year.

You will remember that we launched Verizon on September the 15th last year, and we were starting to wind down T-Mobile in early Q3 as we approached the switch to Verizon. We also had an increase in inventories right at the end of this past quarter here, with the launch of the no-contract iPhone with Virgin Mobile.

Another area where we have also invested is in headphones. This category has been a solid growth category for us, and we look for continued growth. All in, we are comfortable with the quality and the freshness of our inventories at the end of the quarter. I might also note that our accounts payable was up in a similar amount during the quarter, so no real impact on our cash position from this increase in inventories.

We generate positive operating cash flow on a year-to-date basis, and if you look below the operating cash flow line, we continue to closely scrutinize our capital spend. Year-to-date, we have spent nearly $14 million less than last year. We are continuing to invest in the business to fund our growth initiatives and any necessary maintenance, but yet challenging ourselves to ensure that each project is expected to generate a high return.

Our cash position is strong, at over $517 million, and even stronger, if you consider we got restricted cash of $26 million which is used for our general liability insurance, and it saves expenses versus using our revolver. If you combine that with our available credit under the revolver we have, we have over $900 million of total liquidity.

Before we move on to the Q&A section of the call, I wanted to make a brief comment to share with you about our leadership change in our Investor Relations function. First, I want to thank Molly Salky for her service over the past couple of years, leading our Investor Relations and corporate communication functions.

She has decided to move with her family to a new challenge and a new geography. With Molly moving on, I am pleased to announce that Bruce Bishop, who introduced our call this morning, has joined our team with a strong background, and is well suited to filling this role.

Now with that, let me turn it back to the operator and we will begin our Q&A session. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matthew Fassler with Goldman Sachs. Please proceed.

Matthew Fassler – Goldman Sachs

Thanks a lot and good morning.

Jim Gooch

Good morning Matt.

Matthew Fassler – Goldman Sachs

One question and one follow-up. My core question relates to gross margin in the Mobility platform. Can you give us a sense as to whether the margin erosion is a function of the new business that you are taking on, presumably from iPhones coming at a lower margin, or whether the legacy business that you have this, for whatever reason, experiencing an erosion in profitability?

Jim Gooch

It's definitely more from the new business, and if you think about it, we are still in a comparison period where we only had iPhone with one carrier and now we have iPhone with three carriers. So it's definitely more the new business versus the legacy business.

Matthew Fassler – Goldman Sachs

I will keep my follow-ups focused on this same question. Do you make positive gross profit dollars at the transaction level from an iPhone sale, because with the erosion in margins, as sales increase, it would seem that that wouldn't be the case?

Jim Gooch

Yes. We do.

Matthew Fassler – Goldman Sachs

Okay. By the way of follow-up, just on that topic, Apple reported last night and it seems like the iPhone, if anything, had a bit of a pause this quarter. So if you could give us a sense of sort of the cadence of this trend, as you look into Q3, because assuming that we do have a new product release, presumably the iPhone, should gain momentum.

So I could ask you directionally in terms of wireless in general, and then you had a gross margin decline of 500 basis points or so, little more than that in Q1, and in Q2 it was closer to 800 basis points. Q3 last year was when the business started to slip on this front. Does Q3 more like Q1, more like Q2, somewhere between, how would you sort of frame it as iPhones presumably have at least one more quarter of big incremental impact for you?

Jim Gooch

With your last point, you are exactly right. We have one more quarter of iPhone impact, we will start to comp that towards the end of the third quarter and at the beginning of the fourth quarter. We don't know the timing of the new launch at this point, but certainly, we would look to participate in that new launch, and we would look for that new launch to be very meaningful to our business, and whether that happens in the third quarter, or the fourth quarter, you could see that having an impact.

So as I look at the quarters, we are going to continue to have margin pressure. We see some of our initiatives coming onboard that's helping to offset that margin pressure, but it will still be there in the third quarter, and I think the fourth quarter, going into the first quarter will be a much clearer representation about our margin trends, as we look to go into 2013.

Operator

Your next question comes from the line of Greg Melich with ISI Group.

Greg Melich – ISI Group

Hi. It's Greg Melich with ISI.

Jim Gooch

Good morning.

Greg Melich – ISI Group

Two questions. First, I go back to the top line. Basically, the -- if you give a traffic or ticket, obviously the iPhone is lower margin, but it is higher ticket I would assume. So what's the number of transactions doing year-over-year, how should we think about that?

Jim Gooch

I don't think we have shared the specifics on that, but you are absolutely right. What the iPhone and some of the smartphones is driving a healthier market basket, so the sales is being supported by a higher market basket, with a lower ticket count.

Greg Melich – ISI Group

Maybe just comparing it to last quarter, does that trend deteriorate, or it gets better?

Jim Gooch

Fairly consistent.

Greg Melich – ISI Group

Then as a follow-up to Matt's question on the gross margin, just help us out a little bit here, as to -- you mentioned the Target business is less profitable, (inaudible) money help to make it profitable, but then we have talked about how the iPhone, certainly less profitable. Of that 850 bip margin decline year-over-year, could you tell us which was more important, in terms of that decline, whether it be Target or the iPhone?

Jim Gooch

I am not going to get into the details on that. I think, I wanted to give you the color, that if you back out the wireless business, the remaining pieces of our business is flat. You have to remember of course, with the Target business, most of what we are recognizing from sales is just -- of our postpaid wireless, that there is some amount of accessories in there.

As Dorvin said, we are in the process of improving that business. I would anticipate the trend of that business improving as part of the $40 million to $50 million opportunity that we see going into the fourth quarter and going into 2013.

Operator

Your next question comes from the line of Chris Horvers with JP Morgan.

Jim Gooch

Good morning Chris.

Chris Horvers – JP Morgan

Good morning. Maybe a follow-up on Greg's question as well. I mean, it seems like if I run the math, it looks like year-over-year the gross margin impact of Target was maybe 100 basis points and the balance coming out of, I guess mainly iPhone, is that close?

Jim Gooch

You are probably low on Target.

Chris Horvers – JP Morgan

Okay. Maybe can you talk about like, what has -- why has Target fallen short of your profitability expectations so far into this contract? Is it a topline, is it a margin of the transaction itself, because you are sharing kind of the commission on the postpaid business, or is it the lack of accessories, how would you rank those three?

Jim Gooch

I think if you look at the margin pressure that we are under, in our corporate stores, from the postpaid business, and think that that's all we are recognizing in the Target business, so that margin pressure is driving our entire financial performance there, and then unfortunately on the Target business, as our relationship stands, unlike our corporate business, where we can focus on attaching accessories to help with that market basket profitability, we don't have that option, with the Target business.

So I would say it's far or less above topline I think operationally, we continue to do a very good job. I think the business from a traffic perspective is performing fairly consistent with where both sides would like it to be. But overall margin pressure in the industry is really accentuated in that business, since that's the only piece that's part of our partnership.

Operator

Your next question comes from the line of Brian Nagel with Oppenheimer. Please proceed.

Brian Nagel – Oppenheimer

Good morning.

Jim Gooch

Good morning.

Brian Nagel – Oppenheimer

Just shifting gears a bit. You mentioned I think I [caught] in your prepared comments, you talked about the flexibility of your lease portfolio. My question is, if the business continues to struggle here, at the sales and gross margin level, is there any more fog amongst your executive team to rationalize the store base, maybe call out some of the underperforming stores within your network?

Jim Gooch

We continue to look at that. I will tell you that we don't have a significant percentages of our stores that's (inaudible), but are positive. Now, we do have a significant number of our stores that we have talked about before, there is a long tail of lower volume stores that make very little profitability.

So it's a question, can we get some scale back, can we get some throughput back into some of these stores, or if we take out a significant piece of those, would we have an opportunity to right size the SG&A structure in line. I'd tell you right now, there is no plans to do that, we don't see that the model supports that, but we will continue to look at that.

Brian Nagel – Oppenheimer

How should we think about the leases, your store leases? Do a number of those come up for renewal, which could potentially give you this opportunity?

Dorvin Lively

It absolutely does. We have generally over 1,000 leases coming due every year. So it gives us great flexibility, when you look at an average lease term, that will run less than four years.

Brian Nagel – Oppenheimer

Thank you.

Operator

The next question comes from the line of Trent Porter with Guggenheim Securities. Please proceed.

Trent Porter – Guggenheim Securities

Hi guys. Just wanted to clarify the language on your plans for the converts. You say here that you plan to refinance approximately one half of the debt maturity of the debt. In the coming months, with the balance paid down, excess cash. I just wanted to make sure if I am understanding correctly, you are planning on refinancing half in the next few months and paying the rest down with excess cash in the next few months, or is your intention to then pay the balance down, add maturity, and then in same vein, you list a number of options that you are considering. I don't know that you can answer this question, but are you leading in favor of any particular options, for example, new term loan versus debt exchanges or modification of existing debt?

Jim Gooch

The timing of paying down, we haven't finalized yet. We are looking at what our best option is there, and we do have a handful of different options on our debt. I don't think I want to get into the detail of those yet, since some of those conversations are at various stages. But I would say, we have five or six different options that we are looking at.

Operator

Your next question comes from the line of Jeff Kobylarz with Stone Harbor Investment. Please proceed.

Jeff Kobylarz – Stone Harbor Investment

Hi. Just curious you said that you talked about $40 million to $50 million of improvement of profitability in 2013. Can you elaborate a bit more about that?

Jim Gooch

When I was trying to frame and I know we have many initiatives, for a lack of a better term, I would say outside of our core business. So we have been talking about what we are doing on the international side, both in Mexico and in our franchises. We have been talking about what we are doing in our Target business, and then we have been talking about some of our aggressive management on SG&A.

I didn't want to get into the detail of framing up how much each one of those might be worth, but I wanted to lap all of those together to say, that I think all those initiatives from a run rate perspective are probably worth $40 million to $50 million, and we have other initiatives against our core business, the first up there is obviously to stabilize our business which we hope to look to do probably in the fourth quarter, headed into 2013, and then that $40 million to $50 million can be incremental to our overall performance.

Jeff Kobylarz – Stone Harbor Investment

Okay. Also about the third quarter, you said you see sales up and gross margins stabilizing, and SG&A being levered, did I hear that correctly?

Dorvin Lively

No. That's more into the fourth quarter. Into the third quarter, we see sales up. We are going to continue to have gross margin challenge. We will start to see some of these benefits rolling in, in the third and fourth quarter.

Operator

Your next question comes from the line of Brad Thomas with KeyBanc Capital. Please proceed.

Jim Gooch

Good morning Brad.

Brad Thomas – KeyBanc Capital

Good morning Jim. Just a follow-up on the Target conversation. You mentioned you'd like it to be profitable by the end of the year. It seems like you are very much committed to it. But at what point could you review the program, and perhaps pull back, because it doesn't meet the profitability goals that you set out and what are some of the factors that could play out, if you decide to exit that partnership?

Jim Gooch

Well, we are doing that now, and once we get into the back half of this year, we'd have that ongoing opportunity. But I can't stress you enough. But I think both sides, both our side and Target remain very committed to this program. We think it's beneficial to us as we have stated our reasons before, and Target I think still is -- believes the business is very attractive.

They like how we are operationally running the business, and we just both realized that there has been some fundamental changes in the economic model in this business. So we have to look and figure out a solution that makes sense for both sides.

Brad Thomas – KeyBanc Capital

As a quick follow-up on a similar vein, can you just remind us when your contracts could be up for expiration with AT&T, Sprint & Verizon and what opportunities, if any you may have to renegotiate those contracts?

Jim Gooch

They are all staggered and they are all multiyear deals at this point.

Brad Thomas – KeyBanc Capital

Okay. Thank You

Operator

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

Michael Lasser – UBS

Good Morning Thank for taking my question, two actually. Number one, can you talk about the performance of the Mobility segment in the stores that surround Target? Are you seeing any cannibalization in your company owned stores, that's going into Target at this point?

Dorvin Lively

We continue to look at that and I would say that when you add them up, there is no significant impact from these Target businesses. You have to remember that this is a business that has so many points of distribution and so many competitors out there to begin with.

But we have a group of stores that with Target opening, is outperforming. We have a group that's underperforming and a group that's performing at average, and when you look at them in total, I would say, no significant impact

Michael Lasser – UBS

The second question is, as your business becomes more pulled by the Mobility segment, how is your concentration of vendor base changing? Can you give us a quantitative measure of your exposure to certain vendors?

Jim Gooch

I am sorry, your first part of your question broke up?

Michael Lasser – UBS

So as you move more towards Mobility, you are obviously levered towards the carriers a bit more, can you give us some sense of your concentration of your vendor base at this point?

Jim Gooch

Well it's certainly shifting more towards Mobility, whether that be the carriers or whether that be the OEMs. I think it lines up with some of the CE vendors shrinking, the signature vendors have remained fairly constant. Although, some of the categories in there, around categories like headphones have certainly been growing in importance, and our Mobility, whether it be the carriers or whether it be an OEM, is certainly increasing with the size and importance to our business.

Operator

The last question will come from the line of David Gober with Morgan Stanley. Please proceed.

Jim Gooch

Good morning David.

David Gober – Morgan Stanley

Good morning guys. Thanks for taking the question. Jim, you mentioned that the traffic in the Target business was performing in line with what you were hoping. I was just wondering if you could touch on the traffic in the company-owned stores, particularly in the Mobility segment. I am just wondering if you have seen any particular trends between carriers, and it's something you have talked about in the past and particularly with Verizon,

is that performing the way that you guys would have hoped?

Jim Gooch

Verizon is upticking. It's still not where I think either side would hope it would end up. So we still have a lot of focus on awareness. Still have a lot of focus on consumer retention on the Mobility side. I think as I mentioned, with our new ad campaign I think you will see it would be much less aspirational from a brand perspective, and much more specific, hoping to explain the customers exactly what theses wireless offering will look like.

I think the traffic numbers on wireless are so driven by the products, and last year for instance we are in the middle of what was an EVO launch, where we had very strong performance on the old EVO. We are coming up on a point where we launched the iPhone.

So you see huge swings depending on the hot devices. We have the Galaxy out there right now. But at times, has been inventory constrained, but when we have those devices, drives significant traffic and drives nice transactions.

David Gober – Morgan Stanley

I guess where I was trying to go with that was, in the last couple of quarters, you have talked about some of the impacts that Sprint's changes to its upgrade and credit models have had on the business. I am assuming that you are still seeing that in the Sprint business. Have you seen any significant changes with your Verizon? I know they have also had some changes in their upgrade policies as well?

Jim Gooch

The data plan certainly has been, I think, confusing and more challenging at the store level as I explained. But I don't think that drives traffic as much as sometimes conversion, and makes that sales process may be a little more complicated.

On the Sprint side there is no question, that the early upgrade took a significant portion of their overall consumers out of the market. Some of the other changes that we talk about around credit model, wouldn't necessarily change traffic as much as the ability to convert at store level

Bruce Bishop

With that, I believe that's our last question. So again, thank you all for joining the call today.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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