Radio Shack 2013 Annual Report Download - page 21

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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.
EXECUTIVE SUMMARY
Strategic Turnaround Plan
In February 2013 we hired a new Chief Executive Officer to
lead a turnaround of the business by focusing on an initial
set of strategic initiatives (“Strategic Plan”):
• Reposition our brand to reignite our customer base
and connect to a new generation of shoppers
through a modernized and relevant brand position.
• Revamp our product assortment to focus on
relevant categories and higher-margin private
brands.
• Reinvigorate our store experience through the use
of high-touch, interactive content in strategic
locations and the use of key design and aesthetic
elements on a cost-effective basis.
• Increase operational efficiency by evaluating our
retail operations, supply chain, and corporate
functions and reengineering our processes to
emphasize efficiencies.
• Increase our financial flexibility by providing the
necessary capital and liquidity to fund the turnaround
of the business. Refer to Note 5 to our Consolidated
Financial Statements included elsewhere in this
report for further discussion.
The implementation of these strategic initiatives will
continue throughout 2014.
2013 Summary
Net sales and operating revenues decreased $397.0
million, or 10.4%, to $3,434.3 million when compared with
last year. This decrease was primarily driven by an 8.8%
decrease in comparable store sales. We experienced soft
sales in many of our product categories. Areas showing
sales growth were prepaid wireless, portable speakers,
music accessories, and AC adaptors.
Gross profit decreased by $298.2 million, or 20.3%, to
$1,172.2 million when compared with last year. This
decrease was primarily driven by our lower revenue and
our lower gross margin rate. The gross margin rate
decreased from last year by 4.3 percentage points to
34.1%. This was a result of: a change in sales mix towards
higher-priced and lower gross margin rate smartphones; an
inventory write off of $46.6 million in the third quarter
associated with product we have removed from our
assortment; and more aggressive sales promotions such as
aggressive discounts, clearance events, and customer
coupons.
Selling, general and administrative (“SG&A”) expense
decreased $12.4 million, or 0.9%, when compared with last
year. The decrease in SG&A expense was driven primarily
by fewer stores in operation during 2013 versus 2012, and
by lower severance costs in 2013 when compared to 2012
primarily due to severance paid in 2012 to our former Chief
Executive Officer and other corporate headquarters staff
reductions. These decreases were partially offset by
increased professional fees and increased self-insurance
costs related to workers compensation and theft losses.
As a result of the factors above, we incurred an operating
loss of $344.0 million, compared with an operating loss of
$25.0 million last year. Operating income for our U.S.
company-operated stores segment was $73.8 million,
compared with $337.7 million last year.
Loss from continuing operations was $392.0 million, or
$3.89 per diluted share, in 2013, compared with a loss from
continuing operations of $110.8 million, or $1.11 per diluted
share, in 2012.
Update on Postpaid Wireless Business
The combination of the following factors at our U.S.
company-operated stores contributed to the substantial
decrease in consolidated gross profit over the past two
years:
• Total postpaid units sold decreased by 23% in 2013
and decreased by 20% in 2012
• The average cost per unit sold increased by 14.3%
in 2013 and increased by 36% in 2012
• The average revenue per unit sold increased by 7%
in 2013 and increased 19% in 2012
The decrease in the number of postpaid units sold at our
U.S. company-operated stores was primarily driven by
lower than anticipated adoption of new handsets.
The increase in the average revenue per postpaid unit was
primarily driven by a change in our sales mix towards
higher-priced smartphones, partially offset by an increase in
commissions repaid to wireless service providers related to
customers whose wireless handsets were deactivated from
a wireless network. This deactivation took place either
because they could not afford to, or chose not to, pay the
monthly payments for wireless service associated with their
smartphones. For further discussion of our accounting for
these service deactivations, see “Critical Accounting
Policies and Estimates” later in this MD&A.
Discontinued Operations
We ceased operating all of our Target Mobile centers prior
to March 31, 2013, and since then have concluded that the
cash flows from these centers were eliminated from our
ongoing operations. Therefore, the results of these
operations, net of income taxes, have been presented as