Wireless Woes Whack RadioShack

RadioShack (RSH Quote) swung to a second-quarter loss, hit by charges and the poor performance of its wireless business.

The Fort Worth, Texas, electronics retailer lost $3.2 million, or 2 cents a share, for the quarter ended June 30. That compares with a year-ago profit of $52 million, or 33 cents a share. Sales inched up to $1.1 billion from $1.09 billion a year earlier.

Restructuring costs including lease terminations, store liquidation activities, inventory reserves and fixed asset writedowns reduced the company's pretax earnings by $21 million. RadioShack also incurred a pretax expense of $8.5 million in connection with the preliminary settlement of certain wage and hour class action lawsuits.

Second-quarter 2006 gross margin rate was 47.2% vs. 50.7% the previous year, a decline of 351 basis points. Approximately 150 basis points of the gross margin decline was due primarily to liquidation markdowns.

RadioShack said wireless sales rose 2%, but the company pledged to change its approach to that business, saying it is different from the traditional consumer electronics retailing racket, and called for different strategies. RadioShack noted that consumer awareness of its status as a dealer for Cingular, the leading U.S. wireless provider, is low. The company said other trends are working against it as well and said all the gains in its wireless business came at its kiosks.

"RadioShack's wireless tactics did not sufficiently deliver results in the face of changing competitive dynamics and maturing consumer demand," the company said. "To exploit its unique position in the marketplace of wireless retailing, the company is evolving its approach in pricing, promotion, merchandising and the selling process."

RadioShack used $138.5 million in free cash flow through the first half of 2006 vs. a use of $110 million for the same period in 2005. Compared to last year, this year's cash usage was due to less cash generated by operating activities offset in part by lower capital expenditures.

The company ended second quarter 2006 with a cash position of $170 million vs. $255 million in the prior year. The decrease was due primarily to capital structure changes made in the second half of 2005.