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Rating Action:

MOODY'S LOWERS LONG TERM RATINGS OF RADIOSHACK CORPORATION (SENIOR UNSECURED TO Baa2); CONFIRMS PRIME-2 SHORT TERM RATING; OUTLOOK NEGATIVE

14 Mar 2006
MOODY'S LOWERS LONG TERM RATINGS OF RADIOSHACK CORPORATION (SENIOR UNSECURED TO Baa2); CONFIRMS PRIME-2 SHORT TERM RATING; OUTLOOK NEGATIVE

Approximately $500 Million of Debt Securities Affected

New York, March 14, 2006 -- Moody's Investors Service lowered RadioShack Corporation's long-term ratings, including its senior unsecured rating to Baa2 from Baa1, and confirmed the company's Prime-2 rating for commercial paper. The rating outlook remains negative. This rating action concludes the review of RadioShack's ratings for possible downgrade begun on February 22, 2006. The downgrade in the company's long term ratings reflects Moody's concerns that earnings and cash flow may continue to be soft despite the recently announced merchandising and storing initiatives, given the intensely competitive retail environment and the potential for complications during the transition to a new Chief Executive Officer when a permanent one is appointed.

Ratings under lowered:

Senior unsecured issuer rating, notes, and medium term notes to Baa2 from Baa1

Senior unsecured shelf to (P)Baa2 from (P)Baa1

Rating confirmed:

Commercial paper at Prime-2

The downgrade in RadioShack's long term ratings is based on the erosion in gross profit margin during the important holiday quarter from an unexpected weakness in wireless sales, a shift to lower-margined merchandise sales, and a $62 million fourth quarter write-down of slow-moving inventory. The reported operating profit margin of 4.7% in the recent fourth fiscal quarter, combined with the likelihood of further margin reduction in fiscal 2006 from charges of $55 million to $100 million for inventory transition and the closing of at least 400 stores, warranted a lower long-term rating. In response to its anemic performance in fiscal 2005, the company announced on February 17th that it would close 400 to 700 of its owned stores. In addition, RadioShack's turnaround plan will replace older, slower-moving merchandise, expand its kiosk business, and aggressively re-locate RadioShack stores to better real estate over the next 18 months. The company's announced free cash flow guidance for fiscal 2006 of $50 million to $100 million trails fiscal 2005's actual free cash flow of $158 million. Initiatives to boost operating returns are likely to be complicated by the resignation of the CEO, following his February 15th admission that he had misstated his academic record. Chief Operating Officer Claire Babrowski, who joined RadioShack in June 2005 after 30 years at McDonald's Corporation, was promoted to president and acting CEO.

RadioShack's ratings incorporate its national retail franchise, unique merchandising strategy, positive free cash flow and its 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 use of cash and sale/leaseback proceeds in fiscal 2005 to fund a portion of aggressive shareholder enhancement.

With nearly 7000 stores and 700 wireless kiosks in the U.S., 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. 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 kiosks. 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. Financial policy became more aggressive in fiscal 2005, at a time when sales and margins are somewhat soft. Share repurchases of $625.8 million required the use of a portion of cash balances and the proceeds from a sale/leaseback transaction.

The negative rating outlook incorporates the uncertainty about the timing and magnitude of returns from RadioShack's turnaround initiatives over the next 18 months.

Ratings could be lowered if reported operating profit margin is likely to be sustained below 5.5%; if store closings exceed the minimum number of 400 and if these additional store closings will have a material negative impact on sales, operating cash flow or profit margins; if comparable store sales do not grow after store closings have been fully digested; if share repurchases, if any, require external funding; if debt to EBITDA (based on Moody's standard analytic adjustments) is likely to be sustained at more than 3.75 times (versus approximately 3.7 times at fiscal year end 2005); or if free cash flow to debt is likely to be sustained at less than 5% (versus about 8% at fiscal year end 2005).

Conversely, stabilization of the rating outlook requires evidence that the turnaround strategy is gaining traction. Quantitatively, it would require a reported operating profit margin in excess of 7%; growth in nominal and comparable store sales; free cash flow to of debt of 10%; and debt to EBITDA of 3.5 times.

Headquartered in Fort Worth, Texas RadioShack Corporation is a leading consumer electronics retailer with nearly 7000 company and dealer stores, over 100 locations in Mexico and more than 700 wireless kiosks. Revenues for the fiscal year ended December 31, 2005 were approximately $5.08 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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