Radioshack Corporation (RSH) - Description of business

Company Description
GENERAL RadioShack Corporation was incorporated in Delaware in 1967. We primarily engage in the retail sale of consumer electronics goods and services through our RadioShack store chain and non-RadioShack branded kiosk operations. Our strategy is to provide cost-effective solutions to meet the routine electronics needs and distinct electronics wants of our customers. Throughout this report, the terms “our,” “we,” “us” and “RadioShack” refer to RadioShack Corporation, including its subsidiaries. Our day-to-day focus is concentrated in four major areas: ·   Provide our customers a positive in-store experience ·   Grow gross profit dollars by increasing the overall value of each ticket ·   Reduce costs continually throughout the organization ·   Allocate the dollars generated from operations appropriately, investing only in projects that have an adequate return or are operationally necessary Additional information regarding our business segments is presented below and in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) elsewhere in this Annual Report on Form 10-K. For information regarding the net sales and operating revenues and operating income for each of our business segments for fiscal years ended December 31, 2006, 2005 and 2004, please see Note 27 - “Segment Reporting” in the Notes to Consolidated Financial Statements. RADIOSHACK COMPANY-OPERATED STORES At December 31, 2006, we operated 4,467 company-operated stores under the RadioShack brand, located throughout the United States, as well as in Puerto Rico, and the U.S. Virgin Islands. These stores are located in major shopping malls and strip centers, as well as individual storefronts. Each location carries a broad assortment of both private label and third-party branded consumer electronics products. Our product lines include wireless telephones and communication devices such as scanners and two-way radios; flat panel televisions, residential telephones, DVD players, computers and direct-to-home (“DTH”) satellite systems; home entertainment, wireless, imaging and computer accessories; general and special purpose batteries; wire, cable and connectivity products; and digital cameras, radio-controlled cars and other toys, satellite radios and memory players. We also provide consumers access to third-party services such as wireless telephone and DTH satellite activation, satellite radio service, prepaid wireless airtime and extended service plans. KIOSKS At December 31, 2006, we operated 772 kiosks located throughout the United States. These kiosks are primarily inside SAM’S CLUB locations, as well as stand-alone Sprint Nextel kiosks in major shopping malls. These locations, which are not RadioShack-branded, offer primarily wireless handsets, their associated accessories, and DTH satellite systems. We also provide consumers access to third-party wireless telephone services. OTHER In addition to the reportable segments discussed above, we have other sales channels and support operations, described in more detail below. Dealer Outlets: At December 31, 2006, we had a network of 1,587 RadioShack dealer outlets, including 36 located outside of North America and 14 in Canada. These outlets provide private label and third-party branded products and services to smaller communities. These independent dealers are often engaged in other retail operations and augment their businesses with our products and service offerings. Our dealer sales derived outside of the United States are not material. RadioShack.com: Products and information are available through our commercial Web site www.radioshack.com . Online customers can purchase, return or exchange various products available through this Web site. Additionally, certain products ordered online may be picked up, exchanged or returned at neighborhood RadioShack locations. RadioShack Service   Centers: We maintain a service and support network to service the consumer electronics and personal computer retail industry in the U.S. We are a vendor-authorized service provider for many top tier manufacturers, such as Hewlett-Packard, LG Electronics, Motorola, Nokia, RCA/Thomson, and Sony, among others. In addition, we perform repairs for third-party extended service plan providers. At December 31, 2006, we had seven RadioShack service centers in the U.S. and one in Puerto Rico that repair certain name-brand and private label products sold through our various sales channels. International Operations: At December 31, 2006, we had 9 company-operated stores located in major shopping malls and strip centers and 14 dealer outlets in Canada. As of January 31, 2007, we had closed all of our locations in Canada. Additionally, as of December 31, 2006, there were 146 RadioShack-branded stores and 25 dealers in Mexico. These RadioShack-branded stores and dealer outlets are overseen by a joint venture in which we are a minority owner with Grupo Gigante, S.A. de C.V. Our revenues from foreign customers are not material, and we do not have a material amount of long-lived assets located outside of the United States. We do not consolidate the operations of the Mexican joint venture in our consolidated financial statements. Support Operations: Our retail stores, along with our kiosks and dealer outlets, are supported by an established infrastructure. Below are the major components of this support structure. Distribution Centers - At December 31, 2006, we had six distribution centers shipping over one million cartons each month, on average, to our retail stores and dealer outlets. One of these distribution centers also serves as a fulfillment center for our online customers.   RadioShack Technology Services (“RSTS”) - Our management information system architecture is composed of a distributed, online network of computers that links all stores, customer channels, delivery locations, service centers, credit providers, distribution facilities and our home office into a fully integrated system. Each store has its own server to support the point-of-sale (“POS”) system. The majority of our company-operated stores communicate through a broadband network, which provides efficient access to customer support data. This design also allows store management to track sales and inventory at the product or sales associate level. RSTS provides the majority of our programming and systems analysis needs. RadioShack Global Sourcing (“RSGS”) - RSGS serves our wide-ranging international import/export, sourcing, evaluation, logistics and quality control needs. RSGS’s activities support our branded and private label business. RadioShack Customer Support - Using state-of-the-art telephone systems, Web self-help guides and data networks, RadioShack Customer Support responds to more than 1.3 million phone calls and e-mails annually. The responses include answers to customers’ unique requests for hard-to-find parts, batteries and accessories; customer service inquiries; and direct sales requests related to our retail stores. Additionally, in 2006, we outsourced calls regarding our service plans and direct sales requests related to our Web site. Consumer Electronics Manufacturing - We operate two manufacturing facilities in the United States and one overseas manufacturing operation in China. These three manufacturing facilities employed approximately 1,600 employees as of December 31, 2006. We manufacture a variety of products, primarily sold through our retail outlets, including telephony, antennas, wire and cable products, and a variety of “hard-to-find” parts and accessories for consumer electronics products.  SEASONALITY As with most other specialty retailers, our net sales and operating revenues, operating income and cash flows are greater during the winter holiday season than during other periods of the year. There is a corresponding pre-seasonal inventory build-up, which requires working capital related to the anticipated increased sales volume. This is described in “Cash Flow and Liquidity” under MD&A. Also, refer to Note 26 - “Quarterly Data (Unaudited)” in the Notes to Consolidated Financial Statements for our quarterly data, which shows seasonality trends. We expect this seasonality to continue. PATENTS AND TRADEMARKS We own or are licensed to use many trademarks and service marks related to our RadioShack stores in the United States and in foreign countries. We believe the RadioShack name and marks are well recognized by consumers and that the name and marks are associated with high-quality products and services. We also believe the loss of the RadioShack name and RadioShack marks would have a material adverse impact on our business. Our private label manufactured products are sold primarily under the RadioShack trademark and under the Accurian or Gigaware trademark. We also own various patents and patent applications relating to consumer electronic products. We do not own any material patents or trademarks associated with our kiosk operations. SUPPLIERS AND BRANDED RELATIONSHIPS Our business strategy depends, in part, upon our ability to offer private label and third-party branded products, as well as to provide our customers access to third-party services. We utilize a large number of suppliers located in various parts of the world to obtain raw materials and private label merchandise. We do not expect a lack of availability of raw materials or any single private label product to have a material impact on our operations overall or on any of our operating segments. W e have formed vendor and third-party service provider relationships with well-recognized companies such as Sprint Nextel, AT&T, Apple Computer, EchoStar Satellite Corporation (DISH Network), Hewlett-Packard Company and Sirius Satellite Radio. In the aggregate, these relationships have or are expected to have a significant impact on both our operations and financial strategy. C ertain of these relationships are important to our business; the loss of or disruption in supply from these relationships could have a material adverse effect on our net sales and operating revenues until new relationships are formed. Additionally, we have been limited from time to time by various vendors and suppliers strictly on an economic basis where demand has exceeded supply. ORDER BACKLOG We have no material backlog of orders in any of our operating segments for the products or services that we sell. COMPETITION Due to consumer demand for wireless products and services, as well as rapid consumer acceptance of new digital technology products, the consumer electronics retail business continues to be highly competitive, primarily driven by technology and product cycles. In the consumer electronics retailing business, competitive factors include price, product availability, quality and features, consumer services, manufacturing and distribution capability, brand reputation and the number of competitors. We compete in the sale of our products and services with several retail formats, including consumer electronics retailers such as Circuit City and Best Buy. Department and specialty retail stores, such as Sears and The Home Depot, compete on a more select product category scale. AT&T, Sprint Nextel, and other wireless providers compete directly with us in the wireless telephone category through their own retail and online presence. Mass merchandisers such as Wal-Mart and Target, and other alternative channels of distribution such as mail order and e-commerce retailers, compete with us on a more widespread basis. Numerous domestic and foreign companies also manufacture products similar to ours for other retailers, which are sold under nationally-recognized brand names or private labels.  Management believes we have two primary factors differentiating us from our competition. First, we have an extensive physical retail presence with convenient locations throughout the United States. Second, our specially trained sales staff is capable of providing cost-effective solutions for our customers’ routine electronics needs and distinct electronics wants, assisting with the selection of appropriate products and accessories and, when applicable, assisting customers with service activation. While we believe we have an effective business strategy, we cannot give assurance that we will continue to compete successfully in the future, given the highly competitive nature of the consumer electronics retail business. Also, in light of the ever-changing nature of the consumer electronics retail industry, we would be adversely affected if our competitors were able to offer their products at significantly lower prices. Additionally, we would be adversely affected if our competitors were able to introduce innovative or technologically superior products not yet available to us, or if we were unable to obtain certain products in a timely manner or for an extended period of time. Furthermore, our business would be adversely affected if we failed to offer value-added solutions or if our competitors were to enhance their ability to provide these value-added solutions. EMPLOYEES As of December 31, 2006, we had approximately 40,000 employees, including temporary seasonal employees. Approximately 3,000 temporary employees, hired for the holiday selling season, remained at year end. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. We consider our relationship with our employees to be good. AVAILABLE INFORMATION We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the SEC. Copies of these reports, proxy statements and other information can be inspected and copied at: SEC Public Reference Room 100 F Street, N.E. Room 1580 Washington, D.C. 20549-0213 You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of any material we have filed with the SEC by mail at prescribed rates from: Public Reference Section Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-0213 You may obtain these materials electronically by accessing the SEC’s home page on the Internet at: http://www.sec.gov In addition, we make available, free of charge on our Internet Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as our proxy statements, as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. You may review these documents, under the heading “Investor Relations,” by accessing our corporate Web site: http://www.radioshackcorporation.com ITEM 1A. RISK FACTORS. One should carefully consider the following risks and uncertainties described below, as well as other information set forth in this Annual Report on Form 10-K. There may be additional risks that are not presently material or known, and the following list should not be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by us. We may be unable to successfully execute our strategy to provide cost-effective solutions to meet the routine electronics needs and distinct electronics wants of our customers. To achieve our strategy, we have undertaken a variety of strategic initiatives. Our failure to successfully execute our strategy or the occurrence of any of the following events could have a material adverse effect on our business: ·   Our inability to keep our extensive store distribution system updated and conveniently located near our target customers ·   Our employees’ inability to provide solutions, answers, and information related to increasingly complex consumer electronics products ·   Our inability to recognize evolving consumer electronics trends and offer products that customers need and want Our inability to increase or maintain profitability in both our wireless and non-wireless platforms could adversely affect our results. A critical component of our business strategy is to improve our overall profitability. Our ability to increase profitable sales in existing stores may also be affected by: ·   Our success in attracting customers into our stores ·   Our ability to choose the correct mix of products to sell ·   Our ability to keep stores stocked with merchandise customers will purchase ·   Our ability to maintain fully-staffed stores and trained employees Any reductions or changes in the growth rate of the wireless industry or changes in the dynamics of the wireless communications industry could cause a material adverse effect on our gross profits and financial results. Sales of wireless handsets and the related commissions and residual income constitute approximately one-third of our total revenue. Consequently, changes in the wireless industry, such as the ones discussed below, could have a material adverse effect on our results of operations and financial condition. Lack of growth in the overall wireless industry tends to have a corresponding effect on our wireless sales. Because growth in the wireless industry is often driven by the adoption rate of new wireless handset technologies, the absence of these new technologies, or the lack of consumer interest in adopting these new technologies, could lead to slower growth or a decline in wireless industry profitability, as well as in our overall profitability. Another change in the wireless industry that could materially and adversely affect our profitability is wireless industry consolidation. Consolidation in the wireless industry could lead to a concentration of competitive strength, particularly competition from wireless carriers’ retail stores, and could, therefore, adversely affect our business as competitive levels increase. We may not be able to maintain our historical gross margin levels. Historically, we have maintained gross margin levels ranging from 47% to 50%. We may not be able to maintain these margin levels in the future due to various factors, including increased higher sales of lower margin products such as personal electronics products and third-party branded products. If sales of these lower margin items continue to increase and replace sales of higher margin items, our gross margin and overall gross profit levels will be adversely affected. Our competition is both intense and varied, and our failure to effectively compete could adversely affect our financial results.  In the retail consumer electronics marketplace, the level of competition is intense. We compete primarily with traditional consumer electronics retail stores and, to a lesser extent, with alternative channels of distribution such as e-commerce, telephone shopping services and mail order. We also compete with wireless carriers’ retail presence, as discussed above. Changes in the amount and degree of promotional intensity or merchandising strategy exerted by our current competitors and potential new competition could present us with difficulties in retaining existing customers, attracting new customers and maintaining our profit margins. In addition, some of our competitors may use strategies such as lower pricing, wider selection of products, larger store size, higher advertising intensity, improved store design, and more efficient sales methods. While we attempt to differentiate ourselves from our competitors by focusing on the electronics specialty retail market, our business model may not enable us to compete successfully against existing and future competitors. Adverse changes in national or regional U.S. economic conditions could negatively affect our financial results.  Adverse economic changes could have a significant negative impact on U.S. consumer spending, particularly discretionary spending for consumer electronics products, which, in turn, could directly affect our overall sales. Consumer confidence, recessionary and inflationary trends, equity market levels, consumer credit availability, interest rates, consumers’ disposable income and spending levels, energy prices, job growth and unemployment rates may impact the volume of customer traffic and level of sales in our locations. Negative trends of any of these economic conditions, whether national or regional in nature, could adversely affect our financial results, including our net sales and profitability. Our inability to effectively manage our inventory levels, particularly excess or inadequate amounts of inventory, could adversely affect our financial results.  We source inventory both domestically and internationally, and our inventory levels are subject to a number of factors beyond our control. These factors, including technology advancements, reduced consumer spending and consumer disinterest in our product offerings, could lead to excess inventory levels. Additionally, we may not accurately assess appropriate product life cycles or end-of-life products, leaving us with excess inventory. To reduce these inventory levels, we may be required to lower our prices, adversely impacting our margin levels and our financial results. Alternatively, we may have inadequate inventory levels for particular items, including popular selling merchandise, due to factors such as unavailability of products from our vendors, import delays, labor unrest, untimely deliveries or the disruption of international, national or regional transportation systems. The occurrence of any of these factors on our inventory supply could adversely impact our financial results. Our inability to attract, retain and grow an effective management team or changes in the cost or availability of a suitable workforce to manage and support our operating strategies could cause our operating results to suffer.  Our success depends in large part upon our ability to attract, motivate and retain a qualified management team and employees. Qualified individuals needed to fill necessary positions could be in short supply. The inability to recruit and retain such individuals could continue to result in high employee turnover at our stores and in our company overall, which could have a material adverse effect on our business and financial results. Additionally, competition for qualified employees requires us to continually assess our compensation structure. Competition for qualified employees has required, and in the future could require, us to pay higher wages to attract a sufficient number of qualified employees, resulting in higher labor compensation expense. In addition, proposed changes in the federal minimum wage may adversely affect our compensation expense.  Our inability to successfully identify and enter into relationships with developers of new technologies or the failure of these new technologies to be adopted by the market could impact our ability to increase or maintain our sales and profitability. Additionally, the absence of new services or products and product features in the merchandise categories we sell could adversely affect our sales and profitability. Our ability to maintain and increase revenues depends, to a large extent, on the periodic introduction and availability of new products and technologies. If we fail to identify these new products and technologies, or if we fail to enter into relationships with their developers prior to widespread distribution within the market, our sales and gross margins could be adversely affected. Furthermore, it is possible that these new products or technologies will never achieve widespread consumer acceptance, also adversely affecting our sales and profitability. Finally, the lack of innovative consumer electronics products, features or services that can be effectively featured in our store model could also impact our ability to increase or maintain our sales and profitability. Failure to enter into, maintain and renew profitable relationships with providers of third-party branded products could adversely affect our sales and gross margins. Our large selection of third-party branded products makes up a significant portion of our overall sales. If we are unable to create, maintain or renew our relationships with the suppliers of these products, our sales and our gross margins could be adversely impacted. The occurrence of severe weather events or natural disasters could significantly damage or destroy outlets or prohibit consumers from traveling to our retail locations, especially during the peak winter holiday shopping season. If severe weather or a catastrophic natural event, such as a hurricane or earthquake, occurs in a particular region and damages or destroys a significant number of our stores in that area, our overall sales would be reduced accordingly. In addition, if severe weather, such as heavy snowfall or extreme temperatures, discourages or restricts customers in a particular region from traveling to our stores, our sales would also be adversely affected. If severe weather occurs during the fourth quarter holiday season, the adverse impact to our sales and gross profit could be even greater than at other times during the year because we generate a significant portion of our sales and gross profit during this period. We have contingent lease obligations related to our discontinued retail operations that, if realized, could materially and adversely affect our financial results. We have contingent liabilities related to retail leases of locations which were assigned to other businesses. The majority of these contingent liabilities relate to various lease obligations arising from leases assigned to CompUSA, Inc. as part of the sale of our Computer City, Inc. subsidiary to CompUSA in August 1998. In the event CompUSA or the other assignees, as applicable, are unable to fulfill these obligations, we would be responsible for rent due under the leases, which could have a material adverse affect on our financial results. Failure to comply with, or the additional implementation of, restrictions or regulations regarding the products and/or services we sell or changes in tax rules and regulations applicable to us, could adversely affect our business and our results of operations. We are subject to various federal, state, and local laws and regulations including, but not limited to, the Fair Labor Standards Act and ERISA, each as amended, and regulations promulgated by the Internal Revenue Service, the United States Department of Labor, the Occupational Safety and Health Administration, and the Environmental Protection Agency. Failure to properly adhere to these and other applicable laws and regulations could result in the imposition of penalties or adverse legal judgments and could adversely affect our business and our results of operations. Similarly, the cost of complying with newly-implemented laws and regulations could adversely affect our business and our results of operations. Any potential tariffs imposed on products that we import from China, as well as any significant strengthening of China’s currency against the U.S. dollar, could reduce our gross margins and our overall profitability. We purchase a significant portion of our inventory from manufacturers located in China. Changes in trade regulations (including tariffs on imports) or the continued strengthening of the Chinese currency against the U.S. dollar could increase the cost of items we purchase, which in turn could have a material adverse effect on our gross margins. Failure to protect the integrity and security of our customers’ information could expose us to litigation, as well as materially damage our standing with our customers. Increasing costs associated with information security, including increased investments in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud could cause our business and results of operations to suffer materially. Additionally, if a significant compromise in the security of our customer information, including personal identification data, were to occur, it could have a material adverse effect on our reputation, business, operating results and financial condition, and could increase the costs we incur to protect against such security breaches. Any terrorist activities in the U.S., as well as the international war on terror, could adversely affect our results of operations. A terrorist attack or series of attacks on the United States could have a significant adverse impact on the United States’ economy. This downturn in the economy could, in turn, have a material adverse effect on our results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility could cause greater uncertainty and cause the economy to suffer in ways that we currently cannot predict. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. Information on our properties is located in MD&A   and the financial statements included in this Annual Report on Form 10-K and is incorporated into this