Radio Shack 2012 Annual Report Download - page 22

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20
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (“MD&A”).
This MD&A section discusses our results of operations,
liquidity and financial condition, risk management practices,
critical accounting policies and estimates, and certain
factors that may affect our future results, including
economic and industry-wide factors. Our MD&A should be
read in conjunction with our consolidated financial
statements and accompanying notes included in this
Annual Report on Form 10-K, as well as the Risk Factors
set forth in Item 1A above.
2012 SUMMARY
Net sales and operating revenues decreased $120.2
million, or 2.7%, to $4,257.8 million when compared with
last year. This decrease was primarily driven by a 3.5%
decrease in comparable store sales, which was partially
offset by increased sales in our Target Mobile centers that
were open for all of 2012 but not all of 2011. The 3.5%
decrease in comparable store sales was primarily driven by
sales decreases in our consumer electronics and mobility
platforms at our U.S. RadioShack company-operated
stores, which were partially offset by increased sales in our
signature platform and increased comparable store sales at
our Target Mobile centers.
Gross profit decreased by $249.0 million, or 13.8%, to
$1,561.8 million when compared with last year. This
decrease was primarily driven by decreased gross profit in
our postpaid wireless business in our U.S. RadioShack
company-operated stores. Gross margin rate decreased by
4.7 percentage points from last year to 36.7%. The
decrease in our consolidated gross margin rate was a result
of the decrease in the gross margin rate of our postpaid
wireless business. When excluding the postpaid wireless
business, the gross margin rate for the balance of our
business was comparable to 2011.
Selling, general and administrative (“SG&A”) expense
decreased $48.4 million when compared with last year.
This decrease was primarily driven by decreased
advertising expense, decreased rent and occupancy
expense, and decreased compensation expense in the
second half of 2012. Additionally, SG&A in 2012 was lower
due to a one-time $23.4 million charge in 2011 related to
our transition from T-Mobile to Verizon and a one-time $9.5
million charge in 2011 related to the closure of our Chinese
manufacturing plant. These decreases were partially offset
by increased costs in the first half of 2012 to support
additional Target Mobile centers that were not open in the
same period in 2011 and severance costs of $8.5 million in
connection with the departure of our Chief Executive Officer
combined with the termination of employment of certain
corporate headquarters support staff in the third quarter of
2012.
As a result of the factors above, we incurred an operating
loss of $60.9 million, compared with operating income of
$155.1 million last year. Operating income for our U.S.
RadioShack company-operated stores segment was
$337.7 million, compared with $530.2 million last year. The
operating loss for our Target Mobile centers was $37.5
million, compared with an operating loss of $21.0 million
last year.
Our effective tax rate for 2012 was a negative 22.2%,
compared with 37.5% for 2011. The 2012 effective tax rate
was affected by a valuation allowance in the amount of
$68.8 million that we established to reduce our deferred tax
assets. The valuation allowance was partially offset by an
income tax benefit related to our current year operating
loss. See Note 10 – “Income Taxes” in the Notes to
Consolidated Financial Statements included in this Annual
Report on Form 10-K for more information regarding our
2012 income tax expense and valuation allowance.
Loss from continuing operations was $139.4 million, or
$1.39 per share, in 2012, compared with income from
continuing operations of $67.1 million, or $0.70 per diluted
share, in 2011.
EXECUTIVE OVERVIEW
During 2012 our operating results were significantly
affected by our postpaid wireless business in our U.S.
RadioShack company-operated stores and our Target
Mobile segment.
Postpaid Wireless Business
The combination of the following factors at our U.S.
RadioShack company-operated stores contributed to more
than half of our $249.0 million decrease in consolidated
gross profit from 2011:
• Total postpaid units sold decreased by 20% from
2011
• The average cost per unit sold increased by 36%
from 2011
• The average revenue per unit sold increased by 19%
from 2011
These factors were also present at our Target Mobile
centers; however, gross profit increased at our Target
Mobile centers in 2012 due to increased sales primarily
from the additional 646 Target Mobile centers that were
open for the full first six months of 2012 but were not open
for the full first six months of 2011.
The decrease in the number of postpaid units sold at our
U.S. RadioShack company-operated stores was primarily