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Best Buy, Circuit City Enjoy Dec. Sales, But Not Tweeter

1/05/2007 11:42:00 AM Eastern

New York – Seemingly insatiable demand for sharply priced flat-panel TVs and notebook computers helped industry leaders Best Buy and Circuit City end 2006 on a high note, although Tweeter Home Entertainment Group reported double-digit declines for its holiday season quarter.

Best Buy said total sales exceeded management’s expectations by rising 15 percent company-wide for the five weeks ended Dec. 30 to $6.6 billion, while U.S. same store sales grew 6.1 percent.

The company attributed the increases to employees’ “solid execution of the holiday plan” which drove a higher conversion rate, plus the addition of 80 new store openings in the past 12 months and the acquisition of 14 Pacific Sales appliance stores and 131 Five Star stores in China in 2006.

CEO Brad Anderson said the chain enjoyed “exceptional results across the company,” particularly in Canada and online, and that investments in faster checkouts, improved in-stock levels and marketing “appear to be paying off.”

CFO Darren Jackson noted that while the marketplace continued to be competitive in December, Best Buy benefited from “effective promotional strategies and strong retail execution, plus better-than-expected growth from our online channel.”

Specifically, revenue from Best Buy’s Web sites grew about 33 percent during the month, while traffic online and at the company’s call centers “rose significantly.” In addition, memberships in the company’s Reward Zone customer loyalty program increased by 24 percent to 15 million from the end of the November.

On the product front, comparable store sales were especially strong in flat-panel TV, video gaming, portable digital audio devices and notebook computers. Specifically:

  • Comp sales of flat-panel TVs grew by the high double digits, while sales of tube and projection TVs and DVD players declined;

  • Comp sales of MP3 players and accessories grew at double digit rates;

  • Comp sales of home office products fell 2.1 percent on continued declines in printers and desktop computers, partially offset by continued growth in notebook computers and services;

  • Entertainment software comps grew 8.8 percent on solid double-digit gains in video gaming, which more than offset declines in CDs and DVDs;

  • Gift card sales increased by the mid-single digits (although the revenue is not recognized until redemption);

  • Majap comps slipped 2.7 percent compared with last year’s 7.7 percent gain, reflecting general weakness throughout the white goods industry;

  • Enhancements in home theater merchandising and displays helped push CE comps ahead by 11.4 percent, raising its share of the sales mix to 49 percent from 47 percent a year ago.

“We enhanced our home theater experience at more than 300 stores in the past year, and we are confident in our belief that we are continuing to gain market share,” said Best Buy president/COO Brian Dunn. “The investments we made in our systems and inventory in-stock levels, coupled with our investments in home theater, have put us in an outstanding position to meet customers’ growing appetite for a high-definition home theater experience…This work exemplifies what it means to be customer centric.”

At the end of December, the company operated 812 U.S. Best Buy stores with 33 million square feet and opened its first Best Buy store in Shanghai, China, with 86,000 square feet.

Looking ahead, CFO Jackson projected net revenue gains of 16 percent for the full fiscal year and comp store increases of 5 percent.

For Circuit City, December brought record net sales of $2.1 billion, an increase of 5.9 percent company-wide, while U.S. same-store sales grew 4.6 percent for the month ended Dec. 31.

CEO Phil Schoonover attributed the results to an improved customer experience in home entertainment and a better multi-channel shopping experience. The improvements contributed to stronger-than-expected sales during the second half of the month and increases in store traffic and average ticket.

Schoonover added that the gains came despite the continued “intense” promotional environment, particularly in flat-panel TV.

Results by category included:

  • Strong double-digit comparable store sales growth in flat-panel TVs, offset by a strong double-digit decline in direct view TVs;

  • Single-digit comp sales growth of digital cameras, partially offset by double-digit declines in camcorders and DVD hardware;

  • Double-digit comp gains in notebook computers, partially offset by a single-digit decline in desktop models;

  • Strong double-digit comp increases in portable digital audio devices and navigation products, partially offset by double-digit declines in satellite radio and home audio;

  • Strong double-digit comps in video gaming and accessories, low single-digit increases in video software, and double-digit declines in music software;

Web-originated sales grew 31 percent for the month, while services revenue (under the new firedog brand) grew 73 percent and call center sales grew 53 percent year-over-year.

Schoonover said that accelerated sales during the latter half of December encouraged Circuit City to raise its guidance for the full fiscal year to between 9 percent and 10 percent in net sales growth. Comp store sales are expected to grow 7 percent to 8 percent for the fiscal year, although comps will probably slow this month and next due to volatility related to the transition to PCs using Microsoft’s new Vista operating system, he said.

Schoonover added that the company’s merchandising, retail, and direct sales team took measures during December to address some of the gross margin pressures impacting Circuit City and the industry as a result of steep holiday promotions. The chain is also making progress, he said, on “the accelerated initiatives designed to improve our sales and margins as well as to re-rationalize our cost and expense structure, which combined should help deliver sustainable profit growth over the longer term in an environment with lower overall gross margins.”

By contrast, Tweeter Home Entertainment Group reported its sales results for the full quarter, ended Dec. 31. Total revenue for the A/V specialty chain declined 12 percent to $235 million, and comparable store sales fell 10 percent for the period.

President and CEO Joe McGuire attributed the downturn to a dramatic decline in consumer demand for projection TVs, and plummeting average selling prices (ASPs) on plasma displays.

“Our revenue continues to be two different stories: one is the growth in flat-panel TVs, the other is the continued decline in the projection television business that we saw last quarter, and has continued this quarter,” he said.

Specifically, projection TV revenue declined 45 percent, mirroring the category’s performance during the prior quarter. Sales were down more than $22 million for quarter and fell 33 percent in unit volume. Average selling prices declined 18 percent.

As a result, the category slipped from 19 percent of Tweeter’s sales mix during the prior-year quarter to 12 percent, and the company finished December with $19 million less in projection TV inventory than last year.

Conversely, flat-panel sales increased 39 percent in units from the prior quarter to over 43,000 sets, although average selling prices declined 24 percent from the prior-year quarter. Broken out by technology, plasma sales grew 3.5 percent in unit volume to 18,000 panels while ASPs slid 31 percent. LCD sales grew 74 percent in unit volume to 25,000 panels while ASPs rose 3 percent due to increased sales of larger-screen models.

“Our customers clearly embraced 1,080p technology in large LCD flat panels,” McGuire said.

Taken together, total TV unit sales grew 15 percent to 58,000 sets while ASPs declined 25 percent, reducing net revenue by 15 percent and video’s share of Tweeter’s total sales mix to 51 percent from 53 percent last year.

“Gross margin in both categories is down substantially on a year over year basis due to the intense competition in the category,” said McGuire, which may have contributed to his decision to eliminate 20 percent of Tweeter’s headquarters staff in a $6 million cost-savings move. The company plans to announce its earnings for the quarter on Feb. 6.

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