RadioShack Nears Settlement of Federal Class Action Labor Suit

U.S. Dist. Judge Rebecca Pallmeyer, Chicago, found last fall that some managers at RadioShack’s so-called “Y” stores -- those with annual revenue over $500,000 -- were misclassified as exempt from the FLSA provision that requires overtime pay for work outside the standard 40-hour week. The law exempts executives and managers who “customarily and regularly” supervise 2 or more employees.

Store managers Alphonse Perez and Douglas Philips, lead plaintiffs in a 2003 class-action suit with 3,300 members, said managing wasn’t their duty and they didn’t qualify for exemption. About 1,520 class members supervised 80 subordinate hours (2 employees) less than 87% of the time they managed so-called Y stores, the plaintiffs argued. RadioShack said only 726 class members failed to meet the 80- hour mark, and the entire group hit the target 93.6% of the time. The chain also said 64 subordinate hours (two 32-hour employees) fulfilled the requirement. Pallmeyer wrote that FLSA “imposes a bright-line” 80 hours/week subordinate supervision requirement for an executive exemption to apply.

RadioShack’s 2nd-quarter earnings also included $21 million in charges tied to fixed asset write-downs, lease termination costs and inventory liquidations. RadioShack moved earlier this year to close 480 stores and by quarter’s end had shut 432. The remainder will close by month-end, the company said. It also began inventory liquidation sales in April to rid stores of slow-moving products. The move freed 20% of space in the outlets to expand the mix of satellite radios, digital audio players and HD Radio. But the inventory sales reduced RadioShack’s gross margins 1.5%, with overall margins dropping to 47.9% from 50.7%, the company said. The inventory sales are expected to continue in the 3rd quarter, analysts said. Inventory at quarter’s end stood at $795 million, down from $972 million a year earlier. Some new products carry lower gross margins. RadioShack ended the quarter with 4,549 company-owned stores.

RadioShack’s SG&A expenses rose to $461.1 million, from $431.4 million a year ago, including a $14 million charge related to lease buyouts severance and liquidator fees. RadioShack eliminated 300 jobs during the quarter including 152 with the closing of 4 repair/service centers in Bethlehem, Pa., Erlanger, Ky., Greensboro, N.C., and San Leandro, Cal. (CED June 20 p7). It also shut warehouses in Charleston, S.C. and Southaven, Miss. (CED Feb 21 p2) 2nd quarter, ahead of an expected Aug.-Sept. closure, analysts said. RadioShack’s hq workforce also has been trimmed by 100 jobs from a year ago, the company said. SG&A for RadioShack’s cellphone kiosk program also rose to $31 million from $7 million a year earlier. RadioShack added 126 kiosks over the past year and ended the quarter with 777 at Sam’s Club and under the Sprint banner. It plans 1,000 kiosks by year-end.

RadioShack Pres. Claire Babrowski said 2nd-quarter results were “consistent with our expectations,” and the chain’s restructuring from a “cost and timing perspective” were “on or better than plan.” But analysts speculated the recent hiring of Julian Day (CED July 10 p8) as CEO may lead to further management shakeup. CFO David Barnes resigned this week to join Western Union and Day is expected to arrive at RadioShack’s Fort Worth hq on a full-time basis today (Mon.). The release of Q2 results marked the first time RadioShack has dispensed with quarterly earnings calls in favor of “comprehensive” news releases, under a new policy.

“We suspect Mr. Day will ‘clean house’ of the current management team over the next several weeks or months and put his mark on this company going forward,” Citigroup analyst Bill Sims said. “In the meantime, we think it is way too early to be investing in the RadioShack’s stock. While RadioShack may be a good turnaround story in the future, we remain cautious given the current lack of visibility. In addition, as compared to his previous experience in the discount retail industry, Day will now be facing a much more challenging environment in consumer electronics retail, where two much larger players dominate.”

RadioShack also has developed a “cost-effective” plan for upgrading about 750 stores by the start of the holiday selling season. Details, including when the revamping of the stores will begin and how much it will cost, weren’t available at our deadline Fri. RadioShack officials weren’t available for comment.

The chain has expanded to distribution of LCD TVs to 650 stores, which are carrying 2-10 models up to 37W, the retailer said. RadioShack initially tested sales of Akai LCD TVs at its outlets in the Naples, Fla. area, but expects to add LG and Panasonic models as well. The sets will available chainwide by Sept., company officials said.

As RadioShack readies new product categories, Babrowski conceded that the chain must “improve upon the performance of the wireless business.” RadioShack continues to suffer from low awareness among consumers as a distribution point for Cingular’s service, analysts said. RadioShack also has been hampered by Cingular’s small presence in the Northeast U.S. compared with that of its previous supplier, Verizon, analysts said. RadioShack switched to Cingular last year.

In an effort to jump-start its wireless business, RadioShack has tested some “specialized offers” and selling techniques at its stores in the N.Y.C. area. It has about 370 stores in the N.Y. area. “RadioShack intends to collect lessons learned through this test and prepare them for system-wide adoption later this quarter,” Babrowski said. A change in RadioShack’s Sprint business, implemented last year, continues to affect gross margins. The change increased per-unit revenue and cost and depressed margin, analysts said. Offsetting the decline was a previous change in accounting for prepaid airtime that had a 1.5% positive impact, Sims said. Revenue was previously booked for prepaid airtime sales in the entire amount of the transaction; now only the mark-up is booked, he said.

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New RadioShack investor Craig Hall told Dow Jones Newswire he didn’t buy a $120.7 million stake in the chain intending to take it private. But he isn’t ruling that out. “I didn’t buy the stock with any belief that somebody else is going to turn around and take it private or that I'm going to turn around and buy it,” Hall told Dow Jones. Hall said he wasn’t aware of any potential buyers for RadioShack, seemingly discounting reports swirling around the chain since last fall with rumored suitors ranging from other retailers to private equity groups. Hall Financial purchased a 5.64% stake (7.6 million shares) last week, making it the chain’s 4th-largest shareholder. Hall said he will let Day carry out his plan but reserves the right to become more activist -- seeking a board seat or buying more shares -- if necessary. - - Mark Seavy