RadioShack Profit Down 62 Percent

RadioShack Corp. (RSH), whose chief executive officer admitted this week to lying about his academic record, on Friday said quarterly profit plunged 62 percent after a switch in wireless providers led to a large inventory write-down.

The consumer electronics retailer, which is hiring legal counsel to investigate the admission by CEO David Edmondson, also announced a new turnaround plan that includes closing 400 to 700 company-operated stores. It said the plan could result in costs of up to $100 million.

"We have been very cautious on [RadioShack's] ability to execute the wireless transition smoothly and are skeptical on the just-announced turnaround," said Lehman Bros. analyst Alan Rifkin, in a note. "We would not be owners of RSH shares at this time."

Shares of RadioShack fell 6 percent to $19.48 in morning New York Stock Exchange trading.

Fourth-quarter earnings fell to $49.5 million, or 36 cents per share, from $130.9 million, or 81 cents per share, a year ago. Before the effect of an accounting change, earnings per share were 38 cents.

According to Reuters Estimates, excluding 22 cents per share for the inventory write-down, RadioShack's earnings per share would have been 60 cents, which compares with analysts' average estimate of 66 cents per share.

Total sales in the quarter rose 5 percent to $1.67 billion, compared with analysts' target of $1.62 billion.

"Sales results were good in many low-margin non-wireless categories; however, we experienced lower sales in high-margin categories. In addition, wireless sales and profits were below our expectations," Edmondson said in a statement.

Last year, RadioShack said it would switch phone carrier partners in an effort to revive its wireless sales, a key profit driver. It agreed to sell Cingular Wireless phones and cut ties with long-time ally Verizon Wireless. It also signed a new 11-year deal with Sprint Nextel Corp. (S).

But the transition, which took place at the end of the year, turned out to be more difficult than expected.

On Friday, RadioShack said it took an inventory write-down of $62 million in the fourth quarter, and said it is replacing old, slower-moving merchandise with new, faster-moving merchandise.

"Our business model for many years has been based on high- margin, slow-moving products," Edmondson said during an investor presentation. "These products are taking up valuable space in the store that can be much more efficiently utilized."

RadioShack also said it will expand its kiosk business, relocate stores to better sites and close two distribution centers.

The company, which has a total of 7,000 company-owned and dealer stores, estimated it will incur costs of $55 million to $100 million on inventory write-downs and the store closures in 2006, although some of the costs could be taken in 2007 depending on the timing of store closures.

"While the execution of the turnaround plan will trigger the recognition of significant costs, we are confident that the steps we are taking will put RadioShack back on the track to sustained profitable growth," Edmondson said.