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Rating Action:

MOODY'S AFFIRMS LONG-TERM RATING OF RADIOSHACK CORPORATION; AFFIRMS PRIME-2 SHORT TERM RATING; OUTLOOK CHANGED FROM STABLE TO NEGATIVE

08 Aug 2005
MOODY'S AFFIRMS LONG-TERM RATING OF RADIOSHACK CORPORATION; AFFIRMS PRIME-2 SHORT TERM RATING; OUTLOOK CHANGED FROM STABLE TO NEGATIVE

Approximately $600 Million in Debt Securities Affected

New York, August 08, 2005 -- Moody's Investors Service affirmed the Baa1 long-term ratings and Prime-2 short term rating of RadioShack Corporation, but changed the rating outlook from stable to negative following the company's announcement that it had executed an overnight share repurchase transaction of 20 million shares for approximately $500 million, of which about $300 million was funded with debt.

The ratings affirmation reflects the likelihood that the company's strategic initiatives, continuing emphasis on refining its assortments and store environment, opportunities to grow in less traditional formats, and focus on improving operating efficiency will allow post-transaction credit metrics to stabilize in the intermediate term. However, RadioShack will have very little cushion at the Baa1 level and there is a significant risk that the rating could be lowered over the next 12-18 months. The decision to change the outlook to negative incorporates the company's more aggressive financial policy that involves shareholder enhancement at a time when comparable store sales and margins trail recent history and could well continue to do so in the near term.

Ratings affirmed:

Senior unsecured, Medium Term Notes and issuer ratings at Baa1

Senior unsecured shelf at (P)Baa1

Commercial paper at Prime-2

RadioShack's ratings incorporate its national retail franchise, unique merchandising strategy and its financial health and liquidity. The ratings also acknowledge the intense competition from other consumer electronics retailers and the company's own vendors, the need for RadioShack to predict future technology preferences to merchandise appropriately, the obsolescence risk in some product categories and the regular use of excess cash flow to enhance shareholder value.

With over 7400 retail outlets, RadioShack has an extensive retail network to support its competitive strengths of convenience, product knowledge and a destination for a unique assortment of both routine consumer electronics (e.g., batteries) and newer technology goods (such as digital cameras). The company's merchandise connects people, places or things, with each broad product category composed of higher margin anchor items -- wireless, accessories, and batteries -- along with participatory and opportunistic products. Participatory products, like wireless phone contracts that RadioShack sells on behalf of the service provider, generate annuity revenues that raise the productivity of the company's relatively small average store (about 2529 square feet). These alliances with vendors may also allow RadioShack to sell emerging products and services while sharing some marketing and/or product costs. Nonetheless, the company must continually make strategic decisions about the future of new technologies and their rate of customer acceptance. Merchandising risk, however, is softened by RadioShack's extensive offerings of routine consumer electronics goods with low obsolescence risk and high gross margins. While many of its experiments have been successes -- e.g., wireless kiosks in SAM'S CLUB -- some choices like home connectivity and Cool Things @ Blockbuster did not fare so well, but were reversed quickly at relatively modest cost. The inability to add many new RadioShack stores geographically, combined with the modest size of the average store, have provided the incentive for the company to launch new formats, such as Sprint kiosks in malls. The near term negative impact on margins from start-up costs will likely be balanced by better returns from growing sales leverage over the longer term. The recently announced renegotiated wireless contract with Sprint and the new contract with Cingular will enhance profitability and, in the case of Cingular, provide access to more products and the larger GSM market. RadioShack's sales and profitability are also affected by product life cycles. A good example is the steep decline in the retail prices and margins of desktop computers over the years.

Since 2000, the company's business model, appropriate merchandising and retrofitted stores have generated operating cash flow in excess of capital expenditures and aggressive net shareholder enhancement. The recently concluded large overnight share repurchase partially required external funding of $300 million in short term borrowings, of which about $200 million will be refinanced with the proceeds of a sale/leaseback of the corporate headquarters in the fall. RadioShack purchased the 20 million shares from a financial institution that will subsequently purchase shares in the open market over approximately the next four to six months. A purchase price adjustment will be made between the two parties at the end of the program based on the cost of the shares purchased by the financial institution. RadioShack has limited its potential financial exposure in the event of a large increase in its share price during the program.

The negative rating outlook reflects the use of cash and debt for shareholder enhancement at a time when comparable store sales and margins are somewhat soft, when the company has more work to do rolling out standard operating procedures to its entire store base and improving employee turnover, and when there are prospects for future growth.

Ratings could be lowered if share repurchases significantly exceed $625 million in fiscal 2005, if the cost of the overnight share repurchase transaction materially exceeds $500 million, if RadioShack's EBIT margin (calculated with Moody's Standard Adjustments) stabilizes below 9% (was 12.8% at fiscal year end 2004), if comparable store sales do not become positive in the near term, if capital expenditures accelerate materially and/or free cash flow to debt is likely to be below 12% for a sustained period of time. To return to a stable rating outlook, RadioShack needs to demonstrate strongly positive comparable store sales, achievement of expected returns on new wireless contracts, rebound in margins to fiscal 2004 levels, free cash flow to debt over 14% (was 9.6%) and restraint in the pursuit of shareholder enhancement.

Headquartered in Fort Worth, Texas, RadioShack Corporation is a leading consumer electronics retailer with nearly 7,000 company and dealer stores, over 100 locations in Mexico and more than 600 wireless kiosks. Fiscal 2004 sales exceeded $4.8 billion.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Elaine E. Francolino
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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