Best Buy Reports Sales Rise In Q3, But Earnings Off

MINNEAPOLIS — New store openings and a comp-store sales gain of 3.7 percent combined to drive up U.S. Best Buy stores' fiscal third quarter revenue by 9 percent, to $6.4 billion.

A continued shift to higher-ticket items — including flat-panel TVs, major appliances and notebook computers — led to an increase in average transaction size.

When third-quarter revenue for Best Buy's Magnolia Audio Video stores is combined with the Best Buy locations, total domestic stores revenue climbed by another $46 million (excluding the results of Magnolia Home Theater stores, which are reported as part of U.S. Best Buy), and domestic comp-store sales came in at 3.8 percent, compared with 3 percent last year.

Total domestic revenue — Best Buy and Magnolia stores — reached $6.5 billion in the third quarter, up from a year-ago $5.9 billion. Operating income dropped to $198 million in the three months, down from $228 million in 2004. Gross profit as a percent of revenue rose to 24.8 percent in the third quarter, up from a year-earlier 23.4 percent. Expenses increased to 21.7 percent in the quarter, compared with 19.5 percent in the prior year.

Although Best Buy said it generally was pleased with its sales and comp results, earnings fell short of expectations with both consolidated operating and net results below the third quarter last year. The company succinctly said in an investor conference call that it blamed its earnings shortfall on “overspending its expenses” — primarily costs for its customer centricity program, opening seven stores in the Canadian province of Quebec, disappointing overall numbers in Canada, cost of its services business expansion and a somewhat promotional environment.

“We entered this quarter with very ambitious plans for organic growth and transformation activities,” said Brad Anderson, vice chairman/CEO. “We invested aggressively in a portfolio of initiatives. Specifically, we converted a record number of segmented stores, launched Best Buy Canada into Quebec and expanded our services business.

“Clearly, we are over invested in certain transformation activities. As a result, our SG&A spending was unacceptably high. We are evaluating our spending to increase the yield and will edit activities that aren't delivering results,” Anderson said.

Due to strength in sales of audio and video products, high-end CE retail Magnolia Audio Video reported an 18.9 percent comp-store sales increase for the third quarter, ended Nov. 26. Best Buy said it was encouraged by the “enthusiastic” customer response to its Magnolia Home Theater shops, “which takes advantage of the rapid growth in flat-panel televisions through a broader, high-end assortment.”

Best Buy's revenue mix in the third quarter reflected continued growth in its CE products group, which represented 44 percent of third quarter revenue, up from 39 percent year-on-year. The CE products group recorded a 14 percent comp-store sales gain, compared with a year-ago 5.8 percent.

Consolidated third quarter Best Buy revenue increased 10 percent to $7.3 billion, from $6.6 billion in the same three months last year. Comp-store sales were 3.3 percent, compared with 3.2 percent in 2004.

Margin gains in the third quarter rose to 24.4 percent from a year-earlier 23.2 percent, as Best Buy lauded its continued growth of its Geek Squad, as well as a more favorable sales mix and continued contributions from the retailer's private-label products line-up and strategic pricing initiatives.

However, the expense rate in the third quarter climbed to 21.8 percent, from 19.7 percent in the same quarter in 2004, driven by higher store operating costs, including more locations operating under Best Buy's customer centric labor model, as well as costs associated with services.

To that end, consolidated third-quarter operating income slipped to $189 million from a year-ago $233 million, and net income in the same time frame decreased from $148 million in 2004, to $138 million in this year's three months.

For the nine months, U.S. Best Buy stores recorded a 4 percent comp-store increase, down from a year-on-year 5.2 percent.