Radio Shack 2011 Annual Report Download - page 28

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other factors discussed later in this MD&A had an effect on
the decrease of our gross margin rate in 2011.
During 2011, our business experienced a transition to a
lower gross margin rate. This decrease in gross margin rate
has been driven primarily by a transition towards lower
margin products as discussed later in this MD&A.
T-Mobile to Verizon Transition: In 2011, we notified T-
Mobile that it had breached its agreement with us through
which we offered T-Mobile wireless products and services
in our U.S. company-operated stores. We ceased offering
T-Mobile wireless products and services in our U.S.
company-operated stores on September 14, 2011, and
began offering Verizon products and services in our U.S.
company-operated stores on September 15, 2011. In
conjunction with this transition, we recognized a $2.6 million
inventory valuation loss with respect to T-Mobile wireless
handsets we had on hand at June 30, 2011, which was
classified as additional cost of products sold. Furthermore,
in conjunction with this transition, we incurred an additional
charge to earnings of $23.4 million in the third quarter of
2011 relating to a payment to T-Mobile. We continue to sell
T-Mobile wireless products and services in certain Target
Mobile centers.
Our sales of Verizon products and services in our U.S.
company-operated stores from September 15, 2011,
through December 31, 2011, outperformed the sale of T-
Mobile products and services in those stores during the
same period last year, and we view this as a growth
opportunity for us in 2012.
Target Mobile Centers: By December 31, 2011, we had
successfully completed our rollout of Target Mobile centers
in 1,496 Target stores.
Closure of Chinese Manufacturing Plant: We ceased
production operations in our Chinese manufacturing plant
during the second quarter of 2011. Since production
operations ceased, we have continued to acquire inventory
similar to that previously produced by this facility from
alternative product sourcing channels. In conjunction with
the plant closing, we incurred total costs of $11.4 million in
2011. We incurred $7.7 million in compensation expense
for severance packages for the termination of
approximately 1,500 employees. We recorded a foreign
currency exchange loss of $1.5 million related to the
reversal of our foreign currency cumulative translation
adjustment, which is classified as a selling, general and
administrative expense. The remaining $2.2 million relates
to an inventory valuation loss, accelerated depreciation,
and other general and administrative costs. Substantially all
of these costs were incurred in the second quarter of 2011.
Future costs to manage the liquidation, which are not
expected to be significant, will be expensed as incurred and
will include compensation expense such as retention
bonuses for the remaining employees, rent expense, and
professional fees.
Discontinued Operations: All of our remaining kiosks
located in Sam’s Club stores were transitioned to Sam’s
Club by June 30, 2011. We determined that the cash flows
from these kiosks were eliminated from our ongoing
operations. Therefore, these operations were reclassified
from the kiosks segment to discontinued operations in the
second quarter. The operating results of these kiosks are
presented in the consolidated statements of income as
discontinued operations, net of income taxes, for all periods
presented. We incurred no significant gain or loss in
connection with the transition of these kiosks to Sam’s
Club. We redeployed substantially all of our Sam’s Club
kiosk employees to nearby RadioShack stores or Target
Mobile centers, and we redistributed our Sam’s Club kiosk
inventory to our remaining retail channels.
RESULTS OF OPERATIONS
2011 Summary
Net sales and operating revenues increased $112.2 million,
or 2.6%, to $4,378.0 million when compared with last year.
Comparable store sales decreased 2.2%. The increase in
our net sales and operating revenues was driven primarily
by sales at the 646 Target Mobile centers that were open
on December 31, 2011, but not on December 31, 2010.
The increase in sales that was driven by our additional
Target Mobile centers was partially offset by a decrease in
comparable store sales. The decrease in comparable store
sales was primarily driven by sales decreases in our
consumer electronics and signature platforms, which were
partially offset by an increase in our mobility platform sales.
Gross margin decreased by 3.5 percentage points from last
year to 41.4%. This decrease was primarily driven by a
change in our sales mix within our mobility platform towards
lower margin smartphones and tablets, combined with the
overall growth of our mobility platform through our Target
Mobile centers and U.S. RadioShack company-operated
stores. Smartphones generally, and the Apple iPhone in
particular, carry a lower gross margin rate, given their
higher average cost basis. Revenue from smartphones as a
percentage of our mobility platform in 2011 was 17.3
percentage points higher than in 2010. Additionally, our
gross margin rate was negatively affected by more
promotional pricing in the fourth quarter of 2011 when
compared with the same period in 2010.
We expect this change in our sales mix to continue to affect
our gross margin rate in 2012 primarily because of:
customer migration to smartphones, the effect of Sprint and
Verizon offering the iPhone for all of 2012 compared with
less than full years in 2011, and the effect of our recently
opened Target Mobile centers being open for a full year.