RadioShack Corporation Announces 2005 Fourth Quarter, Fiscal Year Financial Results

FORT WORTH, Texas, Feb. 17 /PRNewswire-FirstCall/ -- RadioShack Corporation today announced net income of $49.5 million or $0.36 per diluted share for the quarter ended December 31, 2005 versus net income of $130.9 million or $0.81 per diluted share for the quarter ended December 31, 2004. This represents a fourth quarter 2005 rate of decline of 62% in net income and 56% in diluted earnings per share. Before the cumulative effect of a change in accounting principle, fourth quarter 2005 diluted earnings per share was $0.38.

As reported last month, fourth quarter 2005 comparable store sales were up 4% versus the prior year. Total sales in the fourth quarter of 2005 were up 5% to $1,672 million, compared to total sales of $1,593 million for the previous year.

Fourth quarter 2005 gross margin rate was 41.1% versus 49.3% the previous year, a decline of 819 basis points. The decline was driven primarily by the write-down of $62 million in inventory as well as a merchandise mix shift and more promotional activity versus the prior period.

"Sales results were good in many low-margin non-wireless categories; however, we experienced lower sales in high-margin categories. In addition, wireless sales and profits were below our expectations," said David Edmondson, president and chief executive officer. "The poor fourth quarter performance caused us to take a much deeper look at the state of our business and resulted in the launch of a turnaround plan including the significant fourth quarter inventory write-down."

For fiscal year 2005, RadioShack reported net income of $265.3 million or $1.78 per diluted share versus net income of $337.2 million or $2.08 per diluted share in fiscal year 2004. This represents a fiscal year 2005 decline of 21% in net income and 14% in diluted earnings per share.

The collective full year impact to net income from identifiable transition costs related to RadioShack's termination of its Verizon Wireless agreement was $19 million due to inventory write-downs and labor. The vast majority of costs were incurred in the fourth quarter.

Fiscal year 2005 comparable store sales were up 1% versus the prior year. Total sales in fiscal 2005 were $5,082 million versus $4,841 million in fiscal 2004, an increase of 5%.

"RadioShack failed to achieve its financial objectives in 2005," Edmondson said. "We implemented several key changes including executive management, advertising, store operations, merchandise assortment, long-term wireless agreements, and more. We believe that the company's strategy is sound. But we must move at a much faster pace with a greater sense of urgency, and that is what necessitates our turnaround plan."

RadioShack generated $158.5 million in free cash flow(1) in 2005. Free cash flow for 2005 came in higher than management's prior projections largely due to the timing of year end reconciliation of matters related to the transition of wireless carriers. This factor drove accounts payable at year end approximately $65 million higher than anticipated.

The company is initiating fiscal year 2006 estimated free cash flow guidance of $50 million to $100 million.

The Turnaround

Over the next 18 months, RadioShack intends to achieve three major goals: increase the average unit volume of its core store base, rationalize its cost structure, and grow profitable square feet in its store portfolio.

The company will replace old, slower-moving merchandise with new, faster- moving merchandise within higher growth categories. RadioShack will concentrate its efforts and investment on improving top-performing stores in order to deliver a great customer experience. To do so, it will close 400 - 700 company-operated stores. In addition, the company intends to better align overhead costs with its business model which will help generate more profit per square foot. Lastly, the company will continue to expand its kiosk business and aggressively relocate RadioShack stores to better real estate.

The estimated costs of most of these moves are quantified (in millions) in the following table:

2005 2006 Inventory Transition ($62)* ($5) - ($10) Store Closures $0 ($50) - ($90)+ Total Inventory Transition and Store Closures ($62) ($55) - ($100) * = Includes $11 million related to the inventory transition from Verizon Wireless + = Some costs may be incurred in 2007 depending on the number and timing of store closures

The cash impact on the store closings is expected to be positive due to the sell through of most inventory.

In addition, RadioShack intends to close its distribution centers in Charleston, SC and in Southhaven, MS. The impact to the company's income statement is anticipated to be neutral, but the cash implications are likely to be positive due primarily to the release of a safety stock of inventory.

General and administrative (a.k.a. overhead) expense implications of the turnaround are unknown at the present time. The company will review overhead expenses to identify potential sources of cost reduction.

"While the execution of the turnaround plan will trigger the recognition of significant costs, we are confident that the steps we are taking will put RadioShack back on the track to sustained profitable growth," Edmondson said.

Communication

Today, starting at 9:30 a.m. ET, management will host a live webcast of its annual institutional investor conference to discuss its financial results. The public is invited to listen to the event live on the Internet at http://www.radioshackcorporation.com/ on the Investor Relations page. The webcast will be replayed after the conference.

Statements made in this news release which are forward-looking involve risks and uncertainties and are indicated by words such as "estimated" and other similar words or phrases. These uncertainties include, but are not limited to, the execution and impact of our turnaround plan, economic conditions, product demand, competitive products and pricing, availability of products, the regulatory environment and other risks indicated in filings with the SEC such as RadioShack's most recent Forms 10-K and 10-Q.

Fort Worth, Texas-based RadioShack Corporation is one of the nation's most trusted consumer electronics specialty retailers and a growing provider of a variety of retail support services. The company operates through a vast network of sales channels, including: nearly 7,000 company and dealer stores; over 100 RadioShack locations in Mexico; and more than 700 wireless kiosks. RadioShack's knowledgeable and helpful sales associates deliver convenient product and service solutions within an estimated five minutes of where 94 percent of all Americans either live or work. For more information on RadioShack Corporation, visit http://www.radioshackcorporation.com/. To learn more about RadioShack products and services or to purchase items online, visit http://www.radioshack.com/.

(1) Free cash flow is a non-GAAP financial measure. See reconciliation to net cash provided by operating activities on page 8. RADIOSHACK CORPORATION AND SUBSIDIARIES Consolidated Income Statement (Unaudited) (In millions, except per share amounts) Three Months Increase/ Twelve Months Increase/ Ended (Decrease) Ended (Decrease) December 31, December 31, 2005 2004 2005 2005 2004 2005 vs 2004 vs 2004 Net sales and operating revenues $1,671.9 $1,593.3 $78.6 $5,081.7 $4,841.2 $240.5 Cost of products sold 985.0 808.2 176.8 2,706.3 2,406.7 299.6 Gross profit 686.9 785.1 (98.2) 2,375.4 2,434.5 (59.1) Operating expenses: Selling, general and administrative 575.2 544.5 30.7 1,904.6 1,774.8 129.8 Depreciation and amortization 32.2 28.1 4.1 123.8 101.4 22.4 Total operating expenses 607.4 572.6 34.8 2,028.4 1,876.2 152.2 Operating income 79.5 212.5 (133.0) 347.0 558.3 (211.3) Interest income 1.1 5.5 (4.4) 5.9 11.4 (5.5) Interest expense 14.1 8.6 5.5 44.5 29.6 14.9 Other income, net - - - 10.2 2.0 8.2 Income before income taxes 66.5 209.4 (142.9) 318.6 542.1 (223.5) Provision for income taxes 14.1 78.5 (64.4) 50.4 204.9 (154.5) Income before cumulative effect of change in accounting principle 52.4 130.9 (78.5) 268.2 337.2 (69.0) Cumulative effect of change in accounting principle, net of taxes (2.9) - (2.9) (2.9) - (2.9) Net income $49.5 $130.9 $(81.4) $265.3 $337.2 $(71.9) Net income per share Basic: Income before cumulative effect of change in accounting principle $0.39 $0.82 $(0.43) $1.81 $2.09 $(0.28) Cumulative effect of change in accounting principle, net of taxes $(0.02) $- $(0.02) $(0.02) $- $(0.02) Basic earnings per share $0.37 $0.82 $(0.45) $1.79 $2.09 $(0.30) Diluted: Income before cumulative effect of change in accounting principle $0.38 $0.81 $(0.43) $1.80 $2.08 $(0.28) Cumulative effect of change in accounting principle, net of taxes $(0.02) $- $(0.02) $(0.02) $- $(0.02) Diluted earnings per share $0.36 $0.81 $(0.45) $1.78 $2.08 $(0.30) Avg shares used to compute earnings per share: Basic 135.4 159.3 (23.9) 148.1 161.0 (12.9) Diluted 135.7 160.7 (25.0) 148.8 162.5 (13.7) Shares outstanding 135.0 158.2 (23.2) RADIOSHACK CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In millions) Dec. 31, 2005 Dec. 31, 2004 Assets Cash and cash equivalents $224.0 $437.9 Accounts and notes receivable, net 309.4 241.0 Inventories, net 947.3 1,003.7 Other current assets 130.2 92.5 Total current assets 1,610.9 1,775.1 Property, plant and equipment, net 476.2 652.0 Other assets, net 101.6 89.6 Total assets $2,188.7 $2,516.7 Liabilities and Stockholders' Equity Notes payable $40.9 $55.6 Accounts payable 473.4 442.2 Accrued expenses 382.4 342.1 Income taxes payable 75.0 117.5 Total current liabilities 971.7 957.4 Long-term debt, excluding current maturities 494.9 506.9 Other non-current liabilities 135.1 130.3 Total liabilities 1,601.7 1,594.6 Stockholders' equity 587.0 922.1 Total liabilities and stockholders' equity $2,188.7 $2,516.7 RADIOSHACK CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In millions) Year Ended December 31, 2005 2004 Cash flows from operating activities: Net income $265.3 $337.2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 123.8 101.4 Cumulative effect of change in accounting principle 4.7 - Other items (77.9) 49.9 Changes in operating assets and liabilities: Receivables (68.2) (53.0) Inventories 56.4 (234.2) Other current assets 28.5 (7.5) Accounts payable, accrued expenses, income taxes payable, and other 30.3 158.7 Net cash provided by operating activities 362.9 352.5 Cash flows from investing activities: Additions to property, plant and equipment (170.7) (229.4) Proceeds from sale of property, plant and equipment 226.0 2.5 Purchase of retail subsidiary - (59.1) Other investing activities (16.0) (4.2) Net cash used in investing activities 39.3 (290.2) Cash flows from financing activities: Purchases of treasury stock (625.8) (251.1) Sales of treasury stock to employee stock plans 30.1 35.4 Proceeds from exercise of stock options 17.4 50.4 Payment of dividends (33.7) (39.7) Changes in short-term borrowings, net (4.0) (14.0) Repayments of long-term borrowings (0.1) (40.1) Net cash used in financing activities (616.1) (259.1) Net decrease in cash and cash equivalents (213.9) (196.8) Cash and cash equivalents, beginning of period 437.9 634.7 Cash and cash equivalents, end of period $224.0 $437.9 RADIOSHACK CORPORATION AND SUBSIDIARIES Reconciliation Table of Non-GAAP Financial Measure to GAAP Financial Measures (Unaudited) (In millions except per share amounts) FREE CASH FLOW Year-end 2005 Net cash provided by operating activities $362.9 Less: Additions to property, plant and equipment 170.7 Dividends paid 33.7 Free cash flow $158.5