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RadioShack Corporation (NYSE:RSH)

Q3 2012 Earnings Call

October 23, 2012 9:00 am ET

Executives

Bruce Bishop - Vice President of Investor Relations

Dorvin Lively - Interim Chief Executive Officer

Analysts

Mathew Fassler - Goldman Sachs

Oliver Wintermantel - ISI Group

Denise Chai - Bank of America Merrill Lynch

David Gober - Morgan Stanley

Alan Rifkin - Barclays

Rosemary Sisson - Lazard

William Reuter - Bank of America Merrill Lynch

Dan Wewer - Raymond James

Michael Baker - Deutsche Bank

Trent Porter - Guggenheim Securities

Anthony Chukumba - BB&T Capital Markets

Michael Lasser - UBS

Grant Jordan - Wells Fargo

Operator

Good day, ladies and gentlemen, and welcome to the RadioShack Corp. third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today Mr. Bruce Bishop, Vice President of Investor Relations for RadioShack.

Bruce Bishop - Vice President of Investor Relations

Good morning, everyone, and welcome to the RadioShack third quarter 2012 investor conference call and webcast. With me on the call today is Dorvin Lively, our Interim Chief Executive Officer.

Just to note, we filed our 10-Q with the SEC earlier this morning. Our earnings release and 10-Q filing, along with a replay of this webcast are available on our Investor Relations website at radioshack.com.

Now, I want to remind everyone that we maybe making forward-looking statements on the call today, either in our prepared remarks or in the associated question-and-answer session. These statements would 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 about those results. These risks are detailed in our various filings with the SEC such as our form 10-K as well as our new releases and other communication. The company does not undertake to update or revise any forward-looking statements, which speak only to the time as they are made.

Finally, following our prepared remarks today, we have allowed ample time to address any questions that you may have. Please limit yourselves to one question and one follow-up, so that we may process the entire queue. Feel free to requeue if you have any additional questions.

Now with that, let me turn the call over to Dorvin.

Dorvin Lively - Interim Chief Executive Officer

Thank you, Bruce. Good morning everyone and thank you for taking some time this morning for our call. On our call this morning, I'd like to cover a few items.

First, I'll talk about the performance of our business in the third quarter. I'll also talk about some of the proactive actions that were taking in light of the trends that we're seeing in our business. Then, I'd like to talk about our balance sheet, our cash liquidity and our recent refinancing. And then, I'll end with some comments on our current focus.

First, let me talk about the third quarter performance. Clearly our third quarter was disappointing. As we stated on our second quarter conference call, we expected Q3 to be a difficult quarter, particularly on the gross margin front and it turned out to be even more difficult than we had expected.

We had stated that this quarter would continue to be a difficult comparison when you take a look at the prior year for two issues. First, it was the elimination of the early upgrades that took place last year we've talked about in the past. These were the upgrades reduced our overall postpaid unit volume. And then, second was the rollout of the iPhone across all the carriers, which began last year in Q4.

We believe that our Q3 performance was also affected by some of our customers holding off on their mobility purchases ahead of the launch of the new iPhone 5 in late September and that anticipated launch. We certainly saw the demand for this hot new device as evidenced by pre-orders that we took during the week leading up to this launch.

I think many of you probably are aware of the continued short supply of the iPhone 5, and we've not received as much volume as we would have liked, but we're certainly not alone on this matter. And there is still strong demand and short supply. Our total company sales were down 3%. There were a couple of black spots in this performance and I'd like to talk about that.

First, we continue to see year-over-year growth in our high margin signature business, which generated growth of 3.8% within our U.S. company-operated stores. This marks the fourth consecutive quarter of positive sales growth for this platform and this is significant for us.

Our team's done an outstanding job of executive our strategy around building a strong high margin wireless accessories business. We've added more color and fashion to assortments, and we have 28 difference cases for the iPhone 5 in-stores on the day of launch, which was a strong statement versus our competition.

In fact, approximately 50% of the iPhone 5 cases that we've sold so far have been to customers who purchase their handset elsewhere and came to our stores for their accessories. We're increasingly becoming a destination for these wireless accessories and we're continuing to build on these assortments.

We're also generating continued growth from our headphones business and we've talked about this in the past, and this continues to grow nicely and it contributes to the growth in this platform.

We're also pleased with the growth in our prepaid mobility business. In September, we launched our private label offering in this category and it's off to a very good start. While this is only a small piece of the business today, we expect continued growth as customers become more aware and understand the substantial money savings that you can have from the prepaid model, like a monthly rate plan that can be one-third of the postpaid arrangement with no contract commitments and no termination fees.

As I've stated earlier, we anticipated gross margin rate compression that would continue in the third quarter. This trend has been primarily driven by the increase in sales mix as smartphones.

As we've stated in the past, the average sales price that we recognized is materially higher for the smartphones than the prior featured phones. The related gross margin rates are much lower. Importantly though, the gross profit dollar contribution on a per unit basis is still usually higher across the smartphone business than our featured phone business.

As the iPhone became available on all of three of our postpaid carriers, we saw a dramatic uptick in the mix of these iPhone devices. AT&T has had the iPhone since its launch back in '07. And then Verizon you'll remember last year we launched September 15, and that's when we started carrying the Verizon iPhone in our business. And then Sprint was the last to get the iPhones and that was last year mid-October. Therefore, we're still lapping a quarter last year, where the iPhone was not yet available on all three of these carriers and the related mix was much low.

When we look at the balance of our business and it's similar to Q2 in some respect, we continue to see stable gross margins, excluding our postpaid business. When you look a bit deeper, we saw stable margins in our signature platform and then importantly in our CE business, we saw some gross margin rate improvement, even though it's a much smaller piece of the business. And one that continues to see topline declines really in line with the industry, this rate improvement is huge and it's driving in the right direction.

Given the trends that we've seen in both our sales performance and gross margin performance, we've taken the following proactive steps to address some of these challenges. First, in September, we executed a reduction in force, which allows us to reduce our SG&A cost structure.

While we're sensitive to the impact that this had on our effected employees, the state-of-the-business warranted some actions. In total, we reduced our staff by approximately 150 employees. These reductions were primarily within our corporate functions, which we've reduced by about 10%. In the third quarter, we also recognized a total severance charge related to this of $8.5 million and this did include the CEO severance charge as well.

When comparing the year-over-year reduction in our SG&A expenses, we need to exclude the severance charge this year and then last year we need to exclude the T-Mobile contract termination charge. And when you exclude these one-time items, we've reduced our SG&A by $11 million or 3% versus the prior year.

The second item that we took was, we've talked in the past about the poor performance from our target mobile business. Currently, we manage the postpaid mobility business inside over 1,500 at the target locations. While this model also allows us to sell a few accessories in warranties, we do not manage the prepaid mobility transaction business nor the wider range of accessories offered in target stores.

For RadioShack, this business has been losing money. We've been in discussions with target to revise our agreement. While these discussions are still ongoing, the outcome is uncertain at this time. And as a result, we've executed a termination notice that will allow us to exit this business in April of next year.

We continue to believe that there are strategic benefits to both the target and RadioShack to continue our partnership. And we'd like to see this relationship continue under our new structure and agreement that will drive shareholder value for both companies.

Third, we have successfully completed the $175 million in new financings, since our last earnings call. We accomplished our goal of raising approximately one-half of the debt maturity next year and we're pleased to have this completed behind us, and this refinancing included three elements: first was the $50 million term loan at LIBOR plus 450; second was a $100 million term loan at LIBOR plus 10, and we've disclosed those in the past; and then we just completed a $25 million term loan at LIBOR plus 4.5, this item closed after the quarter ended.

The blended rate on this whole package is about 9%. And another important item is that the $100 million loan, which is the most expensive fees, does include a pre-payment option that allows us to pre-pay $10 million each year with no prepayment penalty or any kind of premium. And it's also noteworthy that we've reduced our future refinancing risk by spreading out these maturities so that our long-term debt now has a smoother set of maturities between 2016 and 2019.

We shared with you on our last call that the proceeds of this financing would be used to refinance a portion of these convertible bonds that come due, and toward that end we've repurchased approximately $88 million in principal of those notes for about $85 million in cash.

Now, let me give you a quick update on our balance sheet. Overall, we continue to have strong balance sheet. Our inventory is increased by about $24 million since end of Q2, and about $60 million year-over-year. And this increase is really driven by wireless and increased cost in some of these wireless handsets, a much broader assortment of wireless accessories that I mentioned earlier and some more investment in the headphone business, as we've seen growth in those categories. This increase in inventory is largely covered by the increase in accounts payable, so no big grip or real big change in the working capital for these items.

We ended the third quarter with about $546 million of unrestricted cash. And I think it's important to note that our operating cash flow for the business was positive at $32 million year-to-date and was positive both in the first and third quarters. In addition, we continue to tightly manage our capital spending and our year-to-date spending we've invested about $18 million, less than last year.

Operating cash flow, lesser capital spending was slightly negative at about $15 million on a year-to-date basis. And also it's important to note, we haven't cut back on our store investments or any of our IT systems over here.

Let me wrap up this section by addressing our liquidity as well. We have total liquidity of $938 million, including the $546 million of unrestricted cash I just mentioned. And about $392 million available under our ABL credit facility that expires in January 2016.

And then finally, let me make a few comments on our near-term outlook and the fourth quarter. The fourth quarter started off slower than we would have liked, primarily due to the continued shorts of lot of the new iPhone 5 handset that I referred to earlier. And some of the same themes of the third quarter will play out here in Q4.

Within our mobility business, this margin compression will continue in our postpaid business as well as a greater mix in smarphones. Specifically the iPhone 5, with the demand of this device continues to be in high supply and they're short at this time, but makes up a big chunk of the business across the whole iPhone devices.

We're also aggressively driving our wireless selling initiative, where we've added some highly trained wireless experts' to some of our high volume stores to take advantage, particularly during the holiday season here. And this initiative allows us to ensure better execution, an experience with the customer and it's very important to our business in Q4. Clearly, it's significant for next year as well.

Another element is the addition of some new selling tools that we've rolled out to our stores. One of these tools is our new opportunity in appointment log, where we can check customer's eligibility for an upgrade as well as proactively then market directly to these customers from our database. Over 50% of our pre-orders for iPhone 5s came from our opportunity log, where we proactively reached out to these customers that had been into our stores, and then we set appointments with them to come in and get their new iPhone 5.

We don't want our customers waiting in long lines and knowing when they'll be able to be served. We couldn't do this for September. This is one of the things we just rolled out recently. But it's just one of the initiatives, where we're trying to drive before our execution in our business in retail.

We expect continued growth in our high margin signature business. We are expanding our wireless assortments and expect to have the iPhone 5 power options within our private label offering this quarter as well. We're also excited about the improvement assortment of our Bluetooth accessories, including headphones and speakers across both our branded SKUs as well as private label.

Our CE business will continue to be challenged on the topline, but we expect continued year-over-year margin rate improvement that I talked about earlier. As we look to 2013, we're continuing to be focused on stabilizing the profitability of our business. And clearly our most critical challenged at this point is stabilizing the gross margin and the profitability of our mobility business and then more specifically within postpaid.

Improvements in the supply of iPhone 5 will certainly help, resolving our target mobile situations also part of this effort. And then for the longer term, we have initiatives like our wireless selling initiative I mentioned, which are designed to improve the overall mobility performance and the customer experience.

At the same time, we're also focusing on the quality of our postpaid wireless sales and that mix between postpaid and no contract. We really need to put the right device into our customers' hands. These and other initiatives will take some time and into next year or before we'll see some meaningful improvements. We do expect to see continued sales and profit growth in our signature business and then the continued stabilization in CE, I just mentioned.

So now with that, let me turn it back over to operator (Jeff) and he will direct our Q&A session.

Question-and-Answer Session

Operator

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

Mathew Fassler - Goldman Sachs

I guess my first question or my main question would relate to your thought process on gross margin in the fourth quarter. You're now getting to the point where you're cycling some of the real damage that was done to the margin structure of the business and that really commenced in the first quarter of last year. Are the issues such that we're likely to see a down gross margin on top of that level? And if so, any sense of magnitude, and just making sure you understand the drivers of that move would be helpful?

Dorvin Lively - Interim Chief Executive Officer

As I mentioned we will have cycle that now with the rollout of spread with iPhone last year in kind of mid-to-late October. I think two or three things that I would discuss regarding the margin issue. One would be is that we've continued to see a higher overall smartphone mix, certainly we expect to see a higher mix of smartphones in Q4 this year than last year. There's have not been a lot of other hot devices frankly that's been out.

I think the Samsung Galaxy 3 is really the last device that's been out and although it was pretty good I think out of the gate, but it tends to slow down a bit. So when you look at the consumer demand for across devices, clearly there is more and more driving towards the smartphones, and now in particular the iPhone devices.

I think that the bigger issue frankly is, in Q4 it will be volume movements as well as clearly there is continued short supply, there is the demand people really hanging on and waiting for that device that obviously is in short supply at the moment. But I think that the bigger issue for Q4 frankly will be that outside of there with a normal supply of product.

I think with some of the continued growth in our signature business I have mentioned earlier, with some of the stabilization I think we've gotten certainly close to it and maybe behind some of the CE business. It kind of comes down to the volume issue frankly from a profitability perspective in Q4.

Mathew Fassler - Goldman Sachs

And from a margin rate perspective, I mean it would seem like doing a little aside from business. I know you'll rather do that business than not. We have to come up with a common number and we'll do that as we think about a margin rate number. Would you expect that number to come under less pressure, given the mix?

Dorvin Lively - Interim Chief Executive Officer

I think it's not only pressure, and the comment I made is I think some of the themes in Q3 are going to continue into Q4. The bigger element from a compression perspective will just probably be the continued mix of business on the higher-end smartphones, which clearly drives a lower margin rate.

Mathew Fassler - Goldman Sachs

And a follow-up very briefly, you're probably wearing a lot of hats right now in the business. I guess you recommended for stepping in. Can you just describe the team with which you're running the company right now, as the company waits to resolve management situation bigger picture?

Dorvin Lively - Interim Chief Executive Officer

We continue to search for our Chief Merchant Officer, and it's something that we've started back before Jim left. We're continuing to do that, we want to find a right guy. But I think we have strong team underneath that. And I think across the other disciplines, I think we have a strong management team.

I'll just go and address the issue, because it will probably come up later regarding the CEO search. The board is very active in that. They've hired a recruiting firm. And they are going to go through that process in a diligent way to make sure that they find the right guy to lead this business down the road. But across the broader disciplines, I think we have a pretty good strong team that can get us through this.

Operator

Our next question comes from the line of Oliver Wintermantel with ISI Group.

Oliver Wintermantel - ISI Group

You mentioned in your 10-Q and in the prepared remarks that you'll be negotiation into contract with target. From your point of view, how would that renegotiate a contract look like ideally? If there are chance that you can get most of the attachments from target or is that not the right way to think about it?

And then as the second question or a follow-up, if you cancelled that contract and you leave target, how would you replace that revenue stream or is that not into negotiations right now?

Dorvin Lively - Interim Chief Executive Officer

I'm not going to go into the details as to the specific arrangements as to how we're renegotiating that. But I would say that from the beginning and through our discussions, we and target have both been on the same page with respect to what needs to happen within the target mobile store, if you will that kiosk within target.

We don't sell prepaid today, as I mentioned earlier, and we sell just a small assortment of accessories, so the broader business of accessories and no contract is targets business today. We've talked about different options, but all options boil down to, can we RadioShack make money. And I've stated this I think in the past that if we can't make any money in that business, we should be out of it. So it really comes down to that. I think there is still some synergies there between what we do to help the target guest, and as I've stated those discussions are ongoing.

With respect to the last part of your question, clearly that element of revenue related to target would go away. And we would look to try to capitalize upon some of the business that we could sell with our own store. I think that there is probably some cost chopping there, but probably not a lot, but we would focus on trying to grab the best value for our customers that come into our stores.

Operator

Our next question comes from the line of Denise Chai of Bank of America Merrill Lynch.

Denise Chai - Bank of America Merrill Lynch

I also have a question on the target relationship. So I see this quarter you've taken an impairment charge on for some others assets, but in case you do terminate the contract by next April, would there be any additional costs associated with that?

Dorvin Lively - Interim Chief Executive Officer

Is the question, if we did terminate it, would there be additional cost?

Denise Chai - Bank of America Merrill Lynch

Yes. For early termination.

Dorvin Lively - Interim Chief Executive Officer

No, I don't think so. The accounting requirements really help dictate this particular charge and it all goes down to the fact that we do not have a final agreement, and we issued our termination notice. That termination notice was available to us beginning on October 1 of this year and that's why we did that. But if we were to end that relationship in April, at this point in time there shouldn't be any further write-offs, because if there were, we would have booked it now.

Denise Chai - Bank of America Merrill Lynch

And just a follow-up on the CEO search. Maybe could you share with us some of the key criteria that your board has in mind in looking for this individual?

Dorvin Lively - Interim Chief Executive Officer

They want someone that clearly has a broad I think industry perspective across some of the platforms that we have, and maybe even across other platforms. But someone that's demonstrated their ability to operate at the CEO level, someone that's a got a strategic insight, to be able to take RadioShack where its at today and to move it and up to tomorrow.

I think qualities managing a broad, a big business. I mean we have a big business with our retail stores across the U.S. as well as our international businesses. I think international is important for us for the long term as well. So I would say those are some of the qualities that they would look for in a profile of that person.

Operator

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

David Gober - Morgan Stanley

I guess someone related to the gross margin question. You've talked about volumes being down significantly and clearly that maybe the bigger issue than the gross margin rate. Could you maybe talk about where you see mobility volumes over maybe the next several quarters what you've seen recently? And particularly in that, have you seen any stabilization in this Sprint business as you start to lap some of the changes that you've highlighted with them? And my guess is that, however the Verizon is growing, but what do AT&T volumes look like at this point?

Dorvin Lively - Interim Chief Executive Officer

Let me just take some of the pieces, the Verizon business now has lapped, the launch of that business last year. And if you look back over the last 12 months, it clearly was not what we wanted it to be, but it did outperform the prior year of the T-Mobile business, and that was positive. I think there is room to grow there as well.

Very pleased with our AT&T business, continues to grow nicely. And then Sprint was the one which we've talked about a lot over the last two to three calls, and it was because of that unit volume decrease. And no doubt it was related to the fact that there were customers that could transact with us every 12 months that could not, once that early upgrade was eliminated.

So when you look forward then, I mean it was in an essence kind of a reset. When you look forward, the way I look at it is that we're in that kind of a unique time now with this iPhone 5 launch, where there was no doubt, demand for that product that consumers were delaying to purchase is not just in a few weeks leading up to it, when it was assumed it was going to happen late September, sometime early October.

The question will be is, once we get through this launch period and kind of work out the supply chain issues, which all of us are clearly facing as well as to what will that mix be, and will consumers continue to framework for the next new device that comes out, et cetera. But from our perspective, one of the things and I referred to it earlier is that we are investing and will continue to invest in labor at stores at the right time to be able to take advantage of that volume when it comes in.

So as an example, one of things we're doing is, we're putting additional labor in our stores right around the first of the month. And we do that because that tends to be, when a lot of consumers want to come in and they are now eligible for an upgrade, and so they can transact during that time period. We had not done that until fairly recently, so scaling up over that time period.

Second, would be in some of our bigger either mall stores or free-standing stores taking dedicated and trained wireless experts, if you will. They understand the devices, they understand the plans and they don't get distracted by trying to make sure that they can sell to the rest of the store, customers that may be in the store. And we have a number of stores that can support that kind of a model. So that's something that we're in the process right now rolling out. And I think that will also help us down the road from a volume perspective as well.

But the iPhone 5 launch has been by far the biggest launch, certainly in the year plus that I've been here, much bigger than the 4S was last year. So we need to work through the launch itself, the hype around that and then the supply chain flow, and get that behind us to see what kind of normal it looks like in terms of kind of the volume flow.

David Gober - Morgan Stanley

And my follow-up regards to the prior strategy to shift the marketing strategy in the back half of the year. Is that still an ongoing process and how should we think about marketing expense in the back half? Are you going forward with the plan that was in place under the previous plan or is that being reevaluated at the moment?

Dorvin Lively - Interim Chief Executive Officer

As you know, we have it really effective in June, July time period. And some of the plans obviously were already in place and few other things you could change are in the short term, but they are now clearly driving with our other marketing team here in the direction of that business.

And the way I look at it, when you look back clearly at Q3, less of an impact from a change of a new agency. They are working very closely with Lippincott as well. They've been in here helping us set that strategy for the longer term. I think you'll start to see more and more of that. Hopefully you've seen some of our more recent television commercials that we've had. We've got TV now in Q4 that we didn't have last year.

So there is a little more emphasis on the mix of our marketing strategy and the media that we're pulling out, certainly for Q4. We're finalizing our plans for next year, now as we speak, so we don't have that locked and loaded yet. But I think you'll continue to see a bit of a shift and the twist as to how we drive more and more awareness of not only just wireless within RadioShack, but what is RadioShack about throughout the rest of the store.

Bruce Bishop - Vice President of Investor Relations

One thing I would add to that is that to the extent that you're contemplating how you forecast the marketing expense, what we can share with you at this point is that our advertising spent in Q3 was down. And as you know we were spending a bit more on TV advertising in Q3 or with our marketing strategy, how we offset that cost was by less print expense. And that thing should continue into Q3, those sort of offset each other.

Operator

Our next question comes from the line of Alan Rifkin with Barclays.

Alan Rifkin - Barclays

Last quarter you told us that with stabilizing gross margins and a lower SG&A rate that you are expecting your operating profit to improve $40 million to $50 million in '13, with positive trends beginning g in Q4. I was wondering, if you could please provide an update to those numbers at that this point in time?

Dorvin Lively - Interim Chief Executive Officer

I think we're still going to see a level of improvement. It may be a little less than that now, just given some of the margin rate compressions we talked about. It may take a little bit longer as well. The trend in terms of the kinds of improvements that I think that we can make, I would say that that trend is still relevant that maybe a little bit later.

You'll probably recall to that comment, Alan, we had said we thought that Q3 would be difficult from a rate compression, but stabilization in Q4. And as I mentioned a little bit earlier, I think that's going to take a bit longer. And I think we will likely see a continued compression in Q4 as well. But I still think that that we'll see some improvement into next year, but maybe not totally to that same extent.

Alan Rifkin - Barclays

And one follow-up, if I may, if you can maybe just give us an update on your relationships with your vendors, are you seeing any of them potentially tighten credit with you, and where does your days payable stand at this point versus last year?

Dorvin Lively - Interim Chief Executive Officer

On your last point, no major change at all. I mean we have not tried to tightly manage that working capital component by trying to squeeze vendor, we have not done that. In terms of relationships with vendor partners, our key major partners I would say, which are clearly the most important in terms of the question I think, no real change at all.

I mean I have been having and continue to have discussions with them on a regular basis, just so they understand our business. I try to do that at the end of each quarter and proactively reach out some of them the other times. I walk them through our liquidity, which I did briefly with you guys a few minutes ago in my prepared remarks. So they understand our working capital situation. They understand the liquidity that we have today.

And I specifically reach out to them so that they would understand the refinancing strategy in terms of where we are going and that we've not gotten that largely behind us. So I'd say, at this point there has been no significant change at all.

Operator

Our next question comes from the line of Rosemary Sisson with Lazard.

Rosemary Sisson - Lazard

You had mentioned earlier that you were going to around the holiday time or at least when your iPhone supply started to improve to put some different types of sales hop in the higher volume stores. I was wondering if you could expand a little bit upon how you determine that they are higher volumes to us, how much of a difference there is in the volume in those stores? How many of those stores there are? What the characteristics are there in terms of location, demographics, whatever, just to get a hand on what the differential might be versus the average?

Dorvin Lively - Interim Chief Executive Officer

We look at really the overall store volume itself and then the mix of mobility within that business. But frankly it's a broad spectrum. There is no one, it's not just major urban, it's not just malls, it's not just true-ups, et cetera. So it's across really all of our different formats. We have some very, very high volume mall stores. They're included into this initiative as well as true-ups, et cetera.

But I guess the key is more of really volume, which translates back to traffic, and then specifically when you see mobility being a high percentage. Now, with that I'd say that we've also said if it's a high trafficking area, but mobility maybe is under indexed a bit, we've said, maybe this is an opportunity as well, so we're doing some of that.

It's still in its rollout stage frankly, so I'm not going to comment as to exactly where the total number is going to be, but it's in the hundreds of stores. We're specifically looking at are we missing an opportunity, because we are not focused on, I guess, the specialty element of what I refer to earlier, when I said wireless selling specialist. We want these guys to be able to understand the devices, understand the plans and be totally focused on that and can give that full attention.

And another element of that I'd say that sort of drives that approach that we're taking is that that process of transacting with a postpaid wireless customer is a fairly long argues process. And it can take upwards a 45 minutes to an hour kind of transaction from the time you walk the customer through what kind of device they want, the plan, et cetera, and get them credit approved.

So we don't want to lose business from the balance of the store with that kind of a long transaction. But we want that customer to feel like that they're being the put the right device and the right plans into their hands. So we already have it out in a few hundred stores at the moment and working through, do we have the right people and do we have the right training and place. And we're still going through that as we speak right now.

Rosemary Sisson - Lazard

In those stores have you notice better conversion rates in terms of people coming into the store and then actually buying versus kind of coming in the store wondering around and leaving?

Dorvin Lively - Interim Chief Executive Officer

Definitely, I think so. I mean it's hard to manage exactly other than to take it to our comp stores, who are comparing it too right now. But it maybe a little unfair to try to compare a store right now doing this issue, the iPhone 5 launch that I've been referring to on the call where demand is high and supply is short, and maybe volume is even down, as people are waiting as well.

But in some of the tests that we did, we were rolling this out. The objective clearly was to get a lift and we're seeing that. Now, we're also evaluating, do we have the right stores in that mix, and we've taken a few stores off of the list, we've put a few stores on the list as we really try to perfect what that lot approaches. Because as I said it's not just wealth, it's a high urban area, so this is the ideal place for the store. There is a number of factors that goes into making sure that we got everything right, but it's still in the rollout phase at the moment.

But what we are certainly pleased with is that when we've done it and when we've done it right, I think with the right people, the right training, and have the product right there for the customers to transact, we're certainly seeing some benefit from that. But it something that we're going to continue to focus on through Q4 as I mention with capitalize on a hard traffic during holiday seasons and then into next year as well.

Operator

Our next question comes from the line of William Reuter with Bank of America Merrill Lynch.

William Reuter - Bank of America Merrill Lynch

My question is, I was looking at the 10-Q and in the notes you noted as a part of your 2011 tax filing that you guys are going to get a refund of $73 million. But when I look at your cash flow statement, you only paid $47 million. Can you help me justify those two numbers?

Dorvin Lively - Interim Chief Executive Officer

The tax filing was accounts receivable element in the quarter, because the cash didn't come in until October. So you'll see it on the AR.

William Reuter - Bank of America Merrill Lynch

No, I'm wondering if you only paid $47 million cash tax as in 2011. How you're getting a refund of $73 million?

Dorvin Lively - Interim Chief Executive Officer

There is also carried backs to that as well.

William Reuter - Bank of America Merrill Lynch

So it's not related necessarily to 2011 and to 2010?

Dorvin Lively - Interim Chief Executive Officer

There is also other elements in the net tax number that gets paid. So you can't relate the $47 million to specifically the issue that drives a tax refund and any related carrybacks. But I think the key point here is that we filed for that refund which we did receive in October. But it's setting on the balance sheet as an AR at September.

William Reuter - Bank of America Merrill Lynch

And then my other question on CapEx, your guidance of $70 million to $80 million implies about $30 million for the fourth quarter which was is the little bit of a jump from 2011? Can you talk a little bit about what this gap might be?

Dorvin Lively - Interim Chief Executive Officer

Yes. It all relates to timing in some of our ongoing IT-related projects and the timing of when those tend to flow. Some of those got pushed more into Q4 that maybe would have normally been into Q3. And we believe we can get most of those completed by the end of this year.

Operator

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

Dan Wewer - Raymond James

Dorvin, I believe you took some impairment charges on company-operated stores as well. Can you remind us approximately how many stores are unprofitable?

Dorvin Lively - Interim Chief Executive Officer

What we've said, Dan is that there is not a significant number of negative four-wall EBITDA stores. And that we really look at this every quarter.

We do it on an annual basis. We do it on a rolling 12-basis et cetera. And if you go back and look at the last say, three years or so we've got stores that will appear to time maybe negative and then they become positive, and then they go back negative or the mix changes from quarter-to-quarter and year-to-year.

So I think here are the key elements as I see it. Number one is it is not a significant number; number two is they tend to somewhat flowed in and out of that; number three is, is that that not just these but all of our stores generally have a fairly short term lease, some of them were frankly annual leases on average. We've said it's kind of that three to four year period.

We can, if we needed to stores that just stay negative, and we've can't just seem to move them into the positive box. We have the ability to close some of those stores.

I think we've closed about 70 stores year-to-date this year. I feel those would have been some of those stores were, for whatever reason maybe the demographics on the market move from where the store had been many, many years ago et cetera. But that kind is a makeup of what that looks like.

Dan Wewer - Raymond James

Then the question on inventories. This is the second consecutive quarter. There has been a significant increase in inventory per store year-over-year. When we first saw the balance sheet this morning, I thought, well this reflects all of the iPhone 5 inventory, but then you noted that that inventory really hasn't arrived yet.

So I'm concerned that this inventory growth is going to get worse before it gets better as you begin to get that inflow of those higher-valued smartphones?

Dorvin Lively - Interim Chief Executive Officer

I would say its sounds from the way you're talking you're certainly concerned out. I would say that I'm not. And I think there is room for improvement. And I kind of refer to that earlier a bit.

It's generally been where we've invested more into a couple of categories that are growing. And we do believe we need a broader assortment. I mentioned two specifically, wireless accessories and headphones. Its two categories are growing, and we found worthy of some additional investment there.

I will tell you that as we manage our, what we refer to end of life inventory, so the issues of where that's going out of the assortment now down the road, that balance is lower this year than last year. So I feel pretty good about that component. But it's something we're going to continue to look at as well. But from a year-over-year comparison, it's not. I mean, it's better than it was the year before.

Dan Wewer - Raymond James

The problem is obviously is using of cash and the gross profit dollars generated from that 7% increase in inventories dropping about 15%.

Dorvin Lively - Interim Chief Executive Officer

And as I said it's something we are going to continue to look at. Look at our assortment mix across the broader selection, other opportunities now with the mix of our business and various handsets to reduce the number of offerings in the store.

What are some of the categories and some of the other platforms that we've seen some decreases in sales to the point and where we can take that out of the assortment? Put it only in our online strategy. So there is number of elements there that we continue to look at and we'll do so in the coming couple of quarters.

Bruce Bishop - Vice President of Investor Relations

Dan, just one quick follow-up on that. The three drivers where wireless handsets, which was contributed by not only iPhone 5 will be a part of that, but that was only one-week of that, but you had also an expanding business within Verizon which has more handsets than T-Mobile there in the prior year, although, were beginning to lapped that launch.

And then you had a wireless accessories and then headsets, all those should be high-quality, fast-moving types of inventory items. To lessen the burden of your risk and also you should note that the AP was up, almost commensurate with the increase in inventory.

Operator

Our next question comes from the line of Michael Baker with Deutsche Bank.

Michael Baker - Deutsche Bank

I wanted to ask about your cost structure, and if there is more that can be done there. You took out 150 people in the home office, but it actually sounds like you're investing even more in store labor.

But in my view, it looks like you're gross margins are going to be at a permanently lower rate. You might lose some top line from getting out of target, which will cause some deleverage. So somewhere I would assume to return back to profitability, you're going to need to take a look at your cost structure and adopted to a lower gross margin rates. So can you talk about any opportunities you might identify there?

Dorvin Lively - Interim Chief Executive Officer

I think it's something we will have to always continue to look at, but we certainly took what we thought was a fairly stringent look at operating structure back in August, when we made that decision.

I would say we had managed that throughout this year a bit where we did had some turnover. We just didn't fill those positions. So there were some in essence open positions that were eliminated as well as part of this.

But I feel pretty good about where that structure is right now. And we'll look and see where our business is over the next few quarters. And look at the margin issue that you raise. And there was no doubt that our business is different than it was six, eight quarters ago with respect to the mix, particularly with mobility at a much higher percentage today. And then you also referenced the target volume.

The target business was primarily only postpaid devices with just a little bit of accessories, and a little bit of warranties. But primarily it's just a device.

We didn't have the option of being able to attach other items into that basket, except for that limited amount that I referred to. Whereas in our stores, we have a much broader selection of skews and one of the things we try to measure ourselves, if someone driving more units, in each of these transaction.

And it's something we have to continue to work on and get better at. But it clearly gives us a chance, to do that even with these high priced devices which drives down the rate that we've been talking about. But if we can add the overall basket, it gives us that opportunity to improve the overall gross profit. So something we got to continue to work on.

Operator

Our next question comes from the line of Trent Porter with Guggenheim Securities.

Trent Porter - Guggenheim Securities

Just a quick question, and then a two part follow-up. The first one, have you guys or can you quantify exactly how much you're losing at target on an annual basis?

Dorvin Lively - Interim Chief Executive Officer

We disclosed actually in the Q, you'll see the number in there. We did enclose the impairment that we've been talking about. I believe the total for the quarter was about $24 million.

Bruce Bishop - Vice President of Investor Relations

Yes, $25.4 million for the quarter and $38.2 million for the year-to-date figure on Page 14 of the Q, in the footnote number four. I wanted to make sure that when you read that and for those listening on the line that don't used to read the detail of that, that does include the impairment of the long-lived assets of $11.7 million. So you need to factor that into the numbers when you've tried to figure out what the run rate is.

Trent Porter - Guggenheim Securities

So on a cash basis $20 million, $27 million for three quarters and maybe $30 million, $35 million for four LTM?

Dorvin Lively - Interim Chief Executive Officer

No. The full amount was about $25 million, but that included the non-cash write off of some assets.

Trent Porter - Guggenheim Securities

And then the Sprint, a quarter or two ago you made a comment that's gotten a lot of play among us investors. I think they said something about efforts to drive customers to the Sprint branded channels. And so I was wondering if you could about what specifically you've seen Sprint retailers do?

Is this something that you've seen among your carrier partners? What's specifically they have been doing, if anything to drive customers to their own captive retailers. And then if you could talk about your market share, ballpark what it is and whether or not if you're measuring it, has it been going up or down over what period in mobility?

Dorvin Lively - Interim Chief Executive Officer

We've not disclosed the total market share but what we have said is this that Sprint is our longest established relationship between the three carriers, most mature relationship. And then AT&T would be number two. We've had them kind of sacked in. And then Verizon as I referred during the call, we started that with Verizon last year on September 15.

With respect to your first part of your question, it's hard to quantify. I mean, we do our market checks and we look at what's going in the markets, in all of the carriers frankly. But in terms of have we seen Sprint do anything specific to pull customers away from us, to drive them to their stores or to any of the other competition, I guess is more the direct question you're asking. And I'd say, no. I haven't seen that.

Now, we're in this period where we've said, our volume of Sprint was down. And our volume of Sprint was down because we had a number of customers during the last 12 months that couldn't transact with us because they had transacted 12 months ago and now they have to wait two years, or wait 24 months or so.

So that's clearly had a big impact into that business. But they market to them every month, I guess by sending them a bill. So they have the means to be able to try to market to them as their coming due for an upgrade.

But I think when we have a product in the store and we do a pretty good job across all three carriers, I mean we believe that's the benefit when you think of shopping a carrier store versus shopping us, is that we can't be agnostic to the brand if you will, and can show the customer generally the same hot handsets across all other carriers.

The final comment, I guess, I'd say is we clearly are much more into a mature market today than we were three or four years ago where they were many more new activations.

And today I think generally speaking, the carriers all have pretty good networks across most of the U.S. and so in those markets where the coverage is pretty good. Generally speaking, customers feel pretty good about their carrier today.

And so the appetite to change carriers is probably not as great as it was sometime ago when they just felt like they weren't getting the kind of coverage that they needed. So today, it's clearly tending to more towards an upgrade market than maybe it was four, five years ago.

Trent Porter - Guggenheim Securities

About the RadioShack's market share in the mobility category as a whole, what kind of market share do you think you have? Is it 3%, 6% and do you think that you've been able to increase that market share over the last couple of few years, given all of the getting the three largest carriers and then all the other changes you've made in the stores?

Dorvin Lively - Interim Chief Executive Officer

The data would say that the carriers probably own about 70%-plus of the market share. I mean, it's hard to get exact numbers in terms of market share out there. But generally speaking the way we try to talk about it, and when I'm talking to investors, I generally use that kind of 70% number, give or take a little bit.

So that means and everybody else is kind of fighting for the 30-ish number and that includes everybody including franchises and independents and et cetera. We haven't commented on exactly about our share, but it's in the single digits. I wouldn't say it's changed drastically if you will go over the last two or three.

Operator

Our next question comes from the line of Anthony Chukumba with BB&T Capital Markets.

Anthony Chukumba - BB&T Capital Markets

You've talked a lot about the iPhone 5 and the effect that that's had on your business. Can you give us some sense for what your initial allocation was of the iPhone 5 compared to the iPhone 4S? And we're sort of hearing in the channel that that allocations were down significantly for non-Apple stores and you seem to be sort of alluding to that. So I'd love to get just a little bit of color on that?

Dorvin Lively - Interim Chief Executive Officer

I guess the way I'd put it in perspective is the out-of-the-gate, versus now we've been into this for a month, I guess. The out-of-the-gate allocations this year, last year was probably down a little bit, but not drastically different. But the way this works is you don't get a months' worth of supply in one week.

So it's clearly a more of a replenishment issue, and that's where I really kind of want to focus, I guess, my comments to your question. I would say by four weeks, six weeks last year with the 4S, there wasn't the same kind of short supplies that you see today. I mean you can go on Apple's website and see what they're saying about their stores.

You can do your market checks with some of the other carriers, and you'll know what they have in stock or what you have to buy, even have it shipped to you, those kinds of things. But there is clearly more demand, more pent-up demand for this device, this time than the S was last time. I think that it was hyped a bit, leading up to it and then after, when it kind of came out, and even if you read some of the articles that came out, it was like sort of no big deal.

You had the Siri element that got added to it and that was somewhat of a big deal to some people, but not much to others. And so now we're sitting four weeks later this time around, and so I guess my point would be is the pent-up demand and the supply is different this time than last time.

Anthony Chukumba - BB&T Capital Markets

I mean would it be fair to say, it almost seems like you're going to hit with a double (NYSE:OME) rate. It sort of like there was this pent-up demand, or if you were holding off on buying any smartphone because there were waiting for the iPhone and now the replenishment hasn't been at the level that you expected.

Dorvin Lively - Interim Chief Executive Officer

Correct.

Operator

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

Michael Lasser - UBS

If we back out the charge, it looks like you lost around $13.7 million in the target relationship in the third quarter. And that's nearly $1 million or more than $1 million, greater than the loss from the first six months of the year. So can you explain why the profitability took another step down for that relationship in the third quarter? Was it due to the dynamics within the wireless market?

And the second part of the question is if you do like to remove yourself from that relationship, should we think about the pro forma impact being greater than that, call it, $26 million run rate through the first three quarters of the year, as far as the impact on your P&L?

Dorvin Lively - Interim Chief Executive Officer

I'm not sure. I got the last part of your question. The first part of it was it still relates to the issues which we've been talking about on the broader RadioShack corporate store business, because most of these have been aligned around mobility and mobility margins. And then if you recall a few comments ago, I mentioned the fact that within target, it's generally just the devices itself.

And with them target then, we are still seeing that that business that we manage there continued higher percentage of smartphones this year versus last year. And then when you throw in some of these other elements that are having a margin compression issue. It just exaggerates that even a little bit more because it's really only a postpaid mobility device basis only.

Michael Lasser - UBS

It's a follow-up question. It seems like the strategy for the near term is that, if you try and improve execution, and that's a continuation of what the strategy has been for really a long time. Is there that point at which you need to take a boarder look at the strategy? Maybe act with a little bit more bigger, a greater sense of urgency and when do you feel like you'll reach that point?

Dorvin Lively - Interim Chief Executive Officer

I think that right now I would say that is exactly the point that we're working on. And it is, where is mobility with respect to the longer term strategy within mobility? What is postpaid versus no contract? It is also a selling of the whole store as opposed to maybe some strategy is design to drive much higher element of mobility sales.

I think there is clearly some things we can do on the assortment side within our signature business that maybe we've gotten away from the past. I think there is a private label element in there as well, where we can have a much more robust assortment of some categories within there that we can get credit for from a private label perspective.

But I would say it is taking a kind of fresh look of the entire strategy related to what the store is today and what it can tomorrow. But that will be something that we're taking a hard look at, and we'll update you probably on that as we develop that.

Operator

Our final question comes from the line of Grant Jordan with Wells Fargo.

Grant Jordan - Wells Fargo

Only thing I had left was with increased liquidity on the balance sheet, are you going to continue to buyback the converts that have the maturity next year?

Dorvin Lively - Interim Chief Executive Officer

We will continue to look at it. And I think it's something that prudently if we can buy those back at a discount, we should look at it. And as I said on the call, we've bought back about $88 million so far. But our point would be to continue to look at that between now and the time that the total principals do.

Grant Jordan - Wells Fargo

Have you brought back any more in the fourth quarter or the $88 million?

Dorvin Lively - Interim Chief Executive Officer

It's just that what we've disclosed.

Okay. Thanks, everybody. Thanks for your time, and for your questions. And we look forward to updating you on our yearend results early next year. But we appreciate your time.

Operator

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

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