| RADIOSHACK CORP ITEM 1A RISK FACTORS The value of an investment in RadioShack involves significant risks and uncertainties |
| One should carefully consider the following risks and uncertainties described below |
| Our turnaround strategy may disrupt our business |
| In February 2006, we announced a turnaround strategy with four components: store rationalization, inventory rationalization, distribution center consolidation, and expense reduction |
| See “Turnaround Program Overview” in MD&A below |
| This turnaround strategy may lead to disruptions in our business, including disruptions from the reduced number of stores, distribution centers and employees, as well as from the rationalization of certain products |
| These disruptions could adversely affect our business operations and our financial results |
| While we believe any disruptions would be short-term, we cannot assure that the impact (whether short-term or long-term) from these disruptions would not be material |
| In addition, if our turnaround strategy is not successful, or if we do not execute the strategy effectively, our business operations and financial results could be adversely affected |
| 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 sales 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 (such as camera or video phones), 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 overall wireless industry sales, as well as in our sales |
| Other changes in the wireless industry that could materially and adversely affect our sales include 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 sales as competitive levels increase |
| The recent changes in our wireless carrier relationships may not be successful, which could cause a material adverse effect on our operations and financial results |
| In July 2005, we signed a long-term agreement with Cingular Wireless to begin offering their GSM wireless service in our stores in January 2006 |
| As a result of entering into this agreement with Cingular, we discontinued the sale of Verizon Wireless’ products and services at the end of 2005 |
| Also, in July 2005, we amended our existing relationship with Sprint PCS Sprint subsequently acquired Nextel, and we began offering Nextel products and services in our stores |
| Additional interruptions could result from changes in selling techniques, marketing approaches, customer base, and product selection |
| In addition, these changes could impact our financial results due to changes in our compensation model, residual income, commission income, gross margins, and handset sales |
| 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 reduced consumer spending and consumer disinterest in our product offerings, could lead to excess inventory levels |
| Additionally, we may not 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 |
| We may not be able to maintain our historical gross margin levels |
| Historically, we have maintained gross margin levels of approximately 50prca |
| We may not be able to maintain these margin levels in the future due to various factors, as well as 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, our overall gross margin levels will be adversely affected |
| Changes in the financial markets or in our results of operations could reduce or eliminate our access to longer term capital or short-term credit availability, which could adversely affect our financial condition and liquidity |
| Depending on our cash flow levels, we may periodically borrow funds in the short-term commercial paper market to fund, among other things, our inventory purchases and operational expenditures |
| Adverse changes in the financial markets that restrict the availability of funds for capital markets borrowing, as well as adverse changes in our results of operations and financial condition, could cause the short-term commercial paper market to be unavailable to us |
| In this event, we would be required to utilize our bank credit facilities |
| We may be unable to successfully execute our solutions strategy to dominate cost-effective solutions to meet everyone’s routine electronics needs and families’ distinct electronics wants |
| To achieve our solutions 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 improve the customer experience in our core and close-to-core channels; to rationalize and improve our infrastructure; to leverage our assets to create new streams of revenue and profit; and to attract, retain, develop, mentor and reward great people; • Our inability to optimize and execute our strategic plans, including our kiosk operations and other sales channels; and • Our inability to successfully identify and analyze emerging growth opportunities in the areas of strategic business alliances, acquisitions, licensing opportunities, new markets, non-store sales channels, and innovative products |
| Our competition is both intense and varied, and our failure to effectively compete could adversely affect our prospects |
| In the retail consumer electronics marketplace, the level of competition is intense |
| We compete primarily with retail stores and, to a lesser extent, with alternative channels of distribution such as e-commerce, telephone shopping services and mail order |
| 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 |
| Furthermore, while we recently re-deployed our RadioShack |
| com e-commerce site, the modifications to this site may not be sufficient to adequately compete with other e-commerce competitors |
| In addition, some of our competitors may use strategies such as lower pricing, wider selection of products, larger store size, 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 allow us to compete successfully against existing and future competitors |
| Adverse changes in national or regional US economic conditions could negatively affect our financial results |
| Adverse economic changes have a significant negative impact on 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 security and unemployment rates directly 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 |
| A critical component of our business results is continued increases in our sales levels |
| Our ability to increase sales in existing stores may also be affected by: • Our success in driving customers into our stores, • Our ability to maintain fully-staffed stores and trained employees, • Our ability to keep stores stocked with the correct merchandise, and • Our ability to choose the correct mix of products to sell |
| 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, such as a large hurricane, tornado 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 could be even greater than at other times during the year because we generate a significant portion of our sales during this period |
| Any additional terrorist activities in the US, as well as the international war on terror, may adversely affect our sales and our stock price |
| An additional 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 sales |
| Furthermore, the threat of terrorist attacks in the United States since September 11, 2001, as well as the ongoing international war on terror, continues to create economic and political uncertainties in the United States |
| 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 |
| In addition, these events could cause or contribute to a general decline in equity valuations, which, in turn, could reduce the market value of RadioShack |
| If we fail to enter into, maintain and renew profitable relationships with providers of third-party branded products, our sales and gross margins could be adversely affected |
| 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 |
| 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 |
| Additionally, the absence of new services or products and product features in the merchandise categories we sell could adversely affect our sales |
| 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 |
| 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 |
| The 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 these positions could be in short supply |
| The inability to recruit and retain such individuals could 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 |
| 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, 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 civil and criminal 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 the potential sudden strengthening of China’s currency against the US 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 US dollar could increase the cost of items we purchase, which in turn could have a material adverse effect on our gross margins |