Best Buy Rides Strong Notebook, Cellphone Sales To Q4 Gains

By Alan Wolf -- TWICE, 4/5/2010

MINNEAPOLIS — Best Buy reported strong double-digit sales and profit gains in its global and U.S. businesses for its fiscal fourth quarter, ended Feb. 27.

Net earnings increased 38 percent to $810 million and net revenue rose 12 percent to $16.6 billion for the three-month period, reflecting a 7 percent gain in compstore sales, the addition of new stores and favorable currency fluctuations.

Within the U.S., net revenue rose 11 percent to $12.6 billion and comp-store sales increased 7.4 percent due to larger average purchases.

The quarter’s strongest product performers included notebook computers and mobile phones, which both saw low double-digit increases in comp-store sales, and flat-panel TVs, whose comp sales grew by the high single digits. The gains in these categories, which Best Buy characterized as critical to its three-screen, connected-world strategy, stemmed from brisk unit growth that helped offset declines in average selling prices, CEO Brian Dunn said in a conference call last month.

But high sales velocity in computers, reflected by the 29th consecutive quarter of double-digit growth in notebooks, also pressured gross margins, chief financial officer Jim Muehlbauer acknowledged during the call.

“Computers have a lower gross profit rate than other categories and have become a bigger part of our mix” due to their central role in the connected-solutions strategy, he told analysts. The company plans to offset the margin hit by attaching more peripherals, extended warranties, broadband subscriptions, content offers and IT support services, while the category’s high unit volume and low expense structure provide strong operating margin, Muehlbauer said.

Within other categories, comps for major appliances increased 6.5 percent, compared with a 20.5 percent decline during the yearago quarter, and services slipped 2.3 percent following a 2.2 percent increase last year. Weakest performers included music and movie software, which declined by the low double digits.

The chain estimates its market share grew about 2.6 percent for the three months, ended Jan. 31, with the most pronounced increases coming in the flat-panel, notebook, mobile phone and digital imaging categories.

For the full fiscal year, net earnings increased 35 percent to $1.4 billion and total revenue grew 10 percent to $49.7 billion, boosted by a 20 percent spike in online revenue, to about $2 billion.

The revenue forecast ref lects the planned opening of 50 to 55 Best Buy stores, mostly in the U.S.; 75 to 100 smallformat stores, comprised largely of U.S. Best Buy Mobile stores; and 10 to 15 Five Star stores in China.

The Best Buy Mobile stores, located in high-traffic areas like shopping malls, are focused on selling “margin-rich” connections for wireless devices, generating greater margin per square foot than the company’s flagship stores, Muehlbauer said.

The smaller-format stores also attract a different customer, notably women, Dunn said, so that “the vast majority” of Mobile shop sales are incremental and do not cannibalize business at the big-box stores.Looking ahead, Best Buy is projecting net revenue gains of 5 percent to 7 percent for the current fiscal year, which would total between $52 billion and $53 billion, and comp- sale increases of 1 percent to 3 percent.