Joe Magnacca
Thank you. I’d like to start today with an update on our balance sheet recapitalization work. I know that’s foremost on people’s minds, and then I’ll give you a brief status update on our efforts to turn the business around and the associated work streams. And I’ll finish with a few comments on the upcoming holiday season.
It’s clear that the current pace of our turnaround is simply not fast enough to address our near term liquidity needs. This is a fact despite the steady progress we are making with our strategic initiatives. Every day we see consumers responding positively to the key elements of our turnaround strategy such as the actions we have taken on reinvigorating our store experience, revamping our product assortment and creating a stronger inventory position. But we know we need additional financial flexibility to move ahead with our goals.
As a result we are actively exploring options for restructuring our balance sheet and are in advance discussions with a number of parties. We are in the process of working with our key financial stakeholders including our existing lenders, bond holders, shareholders and landlords to create a long-term solution that would potentially involve a comprehensive recapitalization. This may include a store based consolidation program and other measures to make significant reductions in our cost structure in order to provide the additional liquidity and time necessary to see the effect of our turnaround strategy.
So now let me share a few thoughts on our second quarter performance. We continue to face an uncertain business environment including fundamental challenges in our mobility business where we are working to optimize profitable transactions. As a result, we believe our reported financial performance for the quarter does not reflect the meaningful progress we are making on several fronts.
I’d like to start with our retail business which represents approximately half of our sales and I am pleased to say we’re making progress and during the quarter we trended in the right direction. In fact, comparable store sales continued to improve during the quarter as a result of our focus on in-stock performance, greater product innovation and better customer service. That trend is continuing into the third quarter and I am proud to say that innovation has become part of the RadioShack DNA; a far cry from where we were before our turnaround efforts began.
As we called out in the last quarter, we have made significant progress in inventory management which is driving some of the success. There is more work to be done, but retail is where we see the most significant progress being made. In that context, operational efficiency is an absolute imperative and we have continued to successfully reduce cost across our business with a particular focus on removing expenses that don’t impact the customer experience including cutting discretionary expenses in our corporate office.
We’re also realizing benefits from our centralized sourcing and supply chain efforts that we discussed on our last call. Importantly, we continue to drive improvements in our on-time delivery and further cost savings in products we source through our highly valued and efficient global sourcing operation which as you know are primarily private brand products.
We recently moved certain elements of product development to the United States and consolidated facilities in China to an appropriately sized overseas operation with top notch talent.
We’ve been keeping in mind the strength of the RadioShack brand and with that have been re-centering on the performance of our private brands. We’ve added more private brand options in areas like portable sound and power thus deepening our penetration of private brand in our stores.
We see demand in this area trending in the right direction with gains each month through the quarter and we are seeing that trend continue. At the end of the day it’s all about the customer experience and to that end we are extremely focused on executing our comprehensive store based consumer centric turnaround strategy.
I know you’re all familiar with the work we are doing on many fronts to revamp our operations and I would like to highlight a few areas today as part of this call. It’s worth remembering that since the beginning of our store revamp process in 2013, we have provided basic upgrades including updated merchandising and product assortments across our full portfolio of stores. Approximately 2,000 of these locations also received upgraded signage, paint, lighting and improved merchandising and presentation.
Our concept stores are a key element of this work and represent the future of RadioShack’s retail footprint. They continue to show positive sales performance as the modern design and interactive experiences they offer drive new traffic. For example, our speaker wall continues to drive year-over-year sales of portable speakers into the triple digits along with our highly successful interactive displays for headphones and tablets. These stores are outperforming the chain and we continue to focus on operational execution, growing sales and driving margin rate improvement.
We’re also pleased with the rollout of our fully scalable interactive remodel program. We now have 84 stores that have been remodeled, drawing from the best of what we have tested and learned in the concept stores. These stores are getting the concept store elements that have been driving success at a low capital cost. The interactive elements include our speaker wall, headphone and wall displays with live demo units, live devices for experiencing phones and tablets and impulse fixtures near the checkout.
All of these features drove strong sales growth for these products in the concept stores. We’ve also allocated space for new product categories like a connected home area, wearable technology, power headquarters, 3D printing and fashion accessories along with floor space for our new service offering Fix-it-here.
Another key element in our strategy is represented by our Fix-it-here, RadioShack labs and DIY initiatives. These are growing and establishing a wider presence across our stores base as we revamp our product assortment and service offerings, bringing in new categories, new brands, new product and new private brand innovation.
These initiatives are particularly important because they’re all emblematic of RadioShack maintaining its relevance to today’s consumer by going back to our roots and reinforcing the strength of the brand. Smart, qualified service and technology expertise simply doesn’t exist in the marketplace and we are strongly positioned to provide it today. Fix-it-here is in more than 500 stores and will continue to grow to 750 locations by November of this year. We are the first national chain to offer in store repair for mobile devices. Fix-it-here is driving incremental, profitable growth in our stores and as a result, we will continue to further accelerate the program.
Our reputation for trustworthy quality service has resulted in strong performance already. RadioShack Labs is a strategic partnership with PCH, a respected leader in product innovation and we’ve already sourced several exciting new products through that relationship, and our DIY initiatives are gaining traction as well like the expansion of our assortment of products, cobranded with Maker Media, a leading community DIY group of makers. As a result, we are making meaningful progress on refreshing 30% to 40% of our assortments this year with new products.
Beyond these efforts to develop a strategic pipeline of innovation and new products, we continue to see strength in the stable of categories that have performed well for us over the past several quarters. Categories that revolve around sound continue to be strong like portable speakers, headphones and sound bars. This includes strong sales of brands like Beats and SOL Republic as well as our growing assortment of products from AUVIO, our private brand. Through our brand purpose of do it together, we do particularly well in driving sales in categories that are new to consumers and which benefit from personal interaction with one of our store associates.
For example, our connected home category of products allows us to have a solution based conversation about the full range of components and infrastructure underpinning the Internet of Things. These products allow our customers to connect with and intuitively manage their surroundings.
In the entertainment category, we continue to see solid sales of streaming media players, where customers are cutting the cable and using new products we’ve added like digital antennas, Google’s Chromecast, Roku’s line of streaming players and Apple TV.
Turning now to our mobility business, there are several factors that have been weighing against us; soft consumer interest in the handsets currently available, aggressive price competition on these products and intense wireless carrier marketing activities. The postpaid mobility business continue to be the primary driver of our sales decrease in the second quarter as consumers anticipated this week’s iconic handset launch and have delayed purchasing or upgrading their phones. This in turn has led to further aggressive price competition on existing handsets among the wireless carriers and other retailers.
They’ve also not seen the full benefit of new carrier financing programs which were only available in our stores for a portion of the quarter. These new financing programs are starting to gain momentum. We will continue to build awareness with consumers that we offer these options. Meanwhile, the carriers continued their intense marketing activities, which included financial incentives to induce customers to switch carriers in addition to new, heavily promoted financing programs.
The entire mobility industry is facing changes and at least one retailer has exited the market. However, we see opportunities for mobility with in our full product mix and we are addressing challenges head-on by focusing on profitable sales. We have already begun to do this by improving technology that we use to sell mobile phones and bringing in new wireless offerings. We believe that over the long-term, our adjusted approach to mobility, less dependent but still a key component of our offerings will make an important contributor to the overall business.
As part of our approach, we are focused on solutions for carrier pre-paid plans. One example of this is our recent announcement that RadioShack will be the exclusive national retailer for Defense Mobile's new nationwide 4G LTE mobile services, which will be offered to over 50 million members of the U.S. military community including those actively serving veterans and their family members. The launch is significant as the first ever mobility program which offers value-added exclusive discounts, content and other benefits that reward and honor our military. I like to think of this as a military loyalty program.
Another example of our commitment to the mobile space is our new partnership with Trustev to use anti-fraud data fingerprinting technology at the point of sale to enhance the customer experience when buying a mobile phone. The Trustev service will allow us to rapidly screen over 260 online customer data points thereby speeding up transaction time. This ensures that we are able to provide the most suitable mobile product and payment structure for their credit profile. Although we’re already making progress on fraud prevention, we believe the introduction of Trustev will provide additional benefit in this area.
Looking at our business as a whole, we have several focused initiative in motion from store remodeling to product merchandizing to marketing and promotional activities. These foundational elements of the Company’s turnaround plan will require careful execution and above all, time to fully take hold.
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