Best Buy Q3 Earnings Up 79%

by Alan Wolf -- TWICE, 12/18/2007

Minneapolis — Strong sales, a more rational promotional environment and labor productivity gains helped Best Buy boost its operating income 79 percent to $351 million for its fiscal third quarter, ended Dec. 1. Net income rose 52 percent to $228 million and net revenue increased 17 percent to $9.9 billion.

Within the company’s domestic segment, comprised of U.S. Best Buy, U.S. Geek Squad, Magnolia Audio Video and Pacific Sales operations, net revenue grew nearly 15 percent to $8.2 billion thanks to the addition of 96 new stores and a same-store sales gain of 6.1 percent, which included the benefit of an extra post-Thanksgiving shopping week.

“We are very encouraged by the strengthening we’re seeing in our customer relationships as well as our solid financial performance,” said Brad Anderson, Best Buy’s vice chairman and CEO. “The loyalty that our employees are building with customers will enable us to expand those relationships into new areas of growth in the future.”

On the product front, comp-store sales gains were driven by higher revenue from video gaming, flat-panel TVs, notebook computers and GPS products, which “more than offset” comp-store sales declines in projection and tube TVs, DVDs and CDs, the company said.

During the period, the company opened 45 Best Buy stores in the United States, including 11 of its 45,000-square-foot stores, 30 of its 30,000-square-foot stores and four of its 20,000-square-foot stores. At the end of the third quarter the domestic segment included 917 Best Buy stores, seven Geek Squad stores, 13 Magnolia Audio Video stores and 17 Pacific Sales showrooms.

The chain also finished the quarter with the new Best Buy Mobile format in 181 U.S. Best Buy locations and now operates seven freestanding Best Buy Mobile stores. The company intends to remodel all of its U.S. Best Buy stores within the next two years to include the Best Buy Mobile concept. The chain also introduced Apple products to 76 additional U.S. Best Buy stores this quarter, for a total of 286 locations, and will offer Dell notebook and desktop computers in all U.S. Best Buy stores beginning on Dec. 30.

“We had outstanding execution across our enterprise, with all of our employees focused on delivering a great experience for our customers,” said Brian Dunn, Best Buy’s president and COO. “We believe we are profitably growing our market share, and we expect the insights we’re gaining every day will simply open more doors for growth in the future. When we get it right for the customer and the employee, it’s electric. It’s very rewarding when it all comes together, like it did this quarter.”

In a research note, Banc of America Securities analyst David Strasser said the “big story” in Best Buy’s results was its solid gross margin gains within its U.S. operations, aided by better expense controls. “Despite a negative mix shift to lower margin video games, laptops and GPS, the company still managed a positive U.S. gross margin, up 20 basis points, and a flat gross margin company-wide,” he observed.