Best Buy Reports Weak Q4 Results

by Alan Wolf -- TWICE, 4/2/2008 12:23:00 PM

Minneapolis — Best Buy reported declines in its fourth-quarter profits and same-store sales amid an economic climate that CEO Brad Anderson described in a conference call today as “serious and very challenging.”

Total revenue increased 4 percent to $13.4 billion for the three months, ended March 1, on net earnings of $737 million, down 3.4 percent from the year-ago period. Same-store sales slipped 0.2 percent.

Sales were fueled by the net addition of 137 new stores, including 98 in the United States, but were impacted by the loss of an extra week in the fiscal quarter. Excluding the calendar shift, revenue grew 9 percent.

Within its U.S. businesses, net sales grew just less than 1 percent to $11.2 billion, operating income fell by $5 million to $1 billion, and same-store sales slipped 0.9 percent. Best Buy attributed the domestic downturn to lower traffic; sales declines in majaps, music, movies, MP3 players and rear-projection TVs; and growth in lower-margin categories including notebook computers and gaming consoles.

Online sales grew by the low double-digits, and the company’s nine freestanding and 181 in-store Best Buy Mobile locations generated double-digit same-store sales during the quarter, outpacing the wireless industry. Pacific Sales, Best Buy’s West Coast home improvement chain, saw revenue rise 1.5 percent to $78 million, driven by five new store openings.

For the full fiscal year, total revenue hit the $40-billion mark, an increase of 11 percent, while operating income increased 8 percent to $2.2 billion and same-store sales rose 2.9 percent worldwide and 1.9 percent domestically. Best Buy estimated that its U.S. market share grew nearly 1 percentage point to 21 percent during the 12 months, while employee turnover improved by 8 percentage points to 60 percent.

The company ended its fiscal year with 357 Apple in-store shops and plans to add 300 more this year, and will remodel the majority of its Best Buy stores to accommodate Best Buy Mobile installations over the next 18 months. All told, the retailer will increase capital expenditures from $800 million to $1.1 billion this year, which will also be earmarked for about 140 new stores worldwide, improvements in information technology and supply-chain infrastructure, and preparations for Best Buy’s entry into Turkey and Mexico.

During the conference call, senior executives said Best Buy would meet the current macroeconomic challenge by outperforming the competition and accelerating international expansion. Fully 40 percent of the company’s growth came from outside the United States during its last fiscal year, said Best Buy International CEO Bob Willett, and offshore markets are critical to its long-term growth and diversification. Best Buy is at an early stage of “building out a connected world,” Willett said, and will forge additional overseas partnerships as it has done with the United Kingdom’s Carphone Warehouse in developing Best Buy Mobile, another key growth opportunity. That business, he noted, nearly doubled its market share in one quarter, and has completely reversed flat or declining sales in Best Buy’s regular wireless departments. President/COO Brian Dunn attributed its success to straightforward pricing, a broad assortment of 90 handsets and upward of nine carriers, and a specially trained sales staff that can explain increasingly complex hardware and software options.

Similarly, Anderson argued, Best Buy’s Blue Shirts “have done a better job than the competition” domestically, resulting in a 2-point increase in customer satisfaction. The company is also turning to its local teams, said Shari Ballard, retail channel management executive VP, to develop market-level innovations to help drive sales growth.

Going forward, the company will target more of its promotional activity toward its 26 million Reward Zone customer-loyalty program members and private-label credit card holders, which comprise its best customers, said Mike Vitelli, customer operating groups executive VP. Best Buy has also improved its process for disposing end-of-life products, he said.

During the quarter the company opened six U.S. Best Buy stores, including two of its 45,000-square-foot stores, three of its 30,000-square-foot stores and one of its 20,000-square-foot stores. By the end of the period, the domestic segment included 923 Best Buy stores, nine Best Buy Mobile stand-alone stores, seven Geek Squad stand-alone stores, 13 Magnolia Audio Video stores and 19 Pacific Sales showrooms. The international segment included 160 Five Star stores and one Best Buy store in China, and 131 Future Shop stores and 51 Best Buy stores in Canada.

On the product front, higher revenue from video gaming, notebook computers, flat-panel TVs and GPS devices were more than offset by declines in projection and tube TVs, MP3 devices, DVDs and CDs, the company said.

Consumer electronics, which represented 42 percent of fourth-quarter revenue, declined 4.6 percent on a comp-store sales basis. Within the category, a low-double-digit comp increase in flat-panel TVs and a triple-digit increase in GPS products led the growth. More than offsetting these gains were declines in projection and tube TVs and in MP3 devices, Best Buy said.

The home-office category accounted for 26 percent of fourth-quarter revenue and had a 5.5 percent comp sales gain. A double-digit comp increase for notebook computers fueled the growth as customers continued to opt for mobility and responded to expanded assortments, the company said. The gain from notebook computers was partially offset by a comp decline for printers, desktop computers and monitors.

The entertainment software category, which comprised 21 percent of fourth-quarter revenue, increased 2.2 percent on a comp-sales basis. A double-digit gain in comp sales of video gaming software and hardware, which was constrained by an industrywide hardware inventory shortage, was partially offset by comp declines for DVDs and CDs.

The appliances category, which totaled 5 percent of fourth-quarter revenue, had a comp-store sales decline of 2.9 percent for the quarter. The falloff was driven by a mid-single-digit decline in the United States due to “a challenging industrywide environment,” Best Buy said. Partially offsetting the downturn was a mid-single-digit gain overseas where appliances represent a larger percentage of the business, primarily in China.

The services category accounted for 5 percent of fourth-quarter revenue and increased 3.9 percent on a comparable store sales basis. A solid double-digit gain in repair revenue plus a low double-digit gain in computer services drove the comp increase. The results were partially offset by single-digit declines in commissions from the sale of extended-service contracts and home theater services, the company said.