twice connect
careers

Best Buy Is Counting On Connectivity Growth

9/23/2010 09:00:00 AM Eastern

MINNEAPOLIS — Best Buy sees broadband connectivity
as its salvation through the recession and beyond.

Despite a lackluster retail environment in which TV revenue
stalled and same-store sales slipped, CEO Brian Dunn
pointed to Best Buy Mobile as the company’s “single-biggest
profit driver” during its second fiscal quarter, and “the
tip of the spear” in its connected world strategy.

Connectivity, he told analysts during an earnings call last
week, has brought the CE industry to “a pivotal, transformational
inflection point,” on par with the analog-to-digital
transition that began 15 years ago.

“The customer wants to be connected all the time,” he
said, “and we are a one-stop shop for all their connectivity
needs.”

Much of Best Buy Mobile’s success stems from its higher
mix of big-ticket smartphones and pricey data plans, as
well as its ability to attach high-margin accessories and
service plans, explained chief financial officer Jim Muehlbauer.
(See Best Buy Mobile profile, Aug. 30, p. 24.)

Mobile sales should further accelerate in the second half
when Best Buy begins selling smartphones online, added
Mike Vitelli, Best Buy’s co-president/Americas.

But smartphone activations aside, opportunity also looms
large in 3G and 4G wireless broadband for netbooks and
tablet computers, high-speed broadband upgrades for the
home, and cable and satellite TV services, all of which provide
an attractive “bounty” for signing subscribers, Muehlbauer
said.

Mobile broadband sales are “growing significantly,” Vitelli
noted, while Dunn pointed to “very good growth” in
TV and satellite sign-ups. “Fifty percent of people who
buy HDTVs don’t have HD service,” Dunn explained, “and
TimeWarner, Comcast and DirecTV are offered in 80 percent
of our stores.”

To further its broadband agenda, Best Buy is remodeling
its computer and home-theater sections to highlight home
networking and faster download speeds, while the central
CD and DVD departments will cede significant real estate
to mobile, motion-control gaming and new e-reader sections.

Indeed, e-readers, motion and 3D gaming, tablet computers,
and connected solutions like IPTV, combined with
aggressive promotions, should bring back shoppers this
holiday season, the executives said.

Pricing is expected to get especially competitive in video, where a dearth of deep discounting has
left TV sales flat. “There’s a lot of pent-up
demand by consumers and vendors,” Vitelli
said. “Things will get more exciting promotionally
in home theater in the second half.”

Dunn described consumer spending as
“episodic,” with shoppers being “highly
selective about when they spend money
… They’re turning their wallets into justin-
time mode.”

Muehlbauer said the “episodic traffic
patterns” will likely continue in the second
half, but described the holidays as
the “biggest episode” of the year.

Vitelli added that this year’s sales surges
have been tied more to product launches
— such as those for iPad and new
Android smartphones — than to traditional
holiday periods, and that the forthcoming
introductions of Xbox Connect,
PlayStation Move and a spate of slate
computers will provide the “episodic
events” for the second half.

Meanwhile, the challenging environment
was reflected in Best Buy’s domestic
second-quarter sales figures, as revenue
edged up 2 percent to $8.4 billion
and comp-store sales declined 1 percent
for the three months ended Aug. 28.

Nevertheless, net earnings soared
more than 60 percent to $254 million
company-wide due to better inventory
management, reduced capital spending,
a higher mix of high-margin connected
products, and lower promotional
costs, Muelhbauer said.

In a statement, Dunn said he was
impressed with Best Buy’s performance
“in a quarter with constrained
consumer spending.”

Specifically, the company increased
sales from connection solutions
and attached connections at
a low double-digit rate for customers
purchasing connectable devices
such as mobile phones, computers
and TVs, which drove “a meaningful
increase” in its domestic gross-profit
dollar growth for the period.

The comp decline was driven primarily
by reduced customer traffic,
partially offset by an increase in average
ticket. The domestic segment
experienced a low double-digit compstore
sales increase in mobile phones,
a high single-digit comp-store sales
increase in appliances and a mid-single-
digit comp-store sales increase
in mobile computers, which includes
tablet computers.

These gains were more than offset
by comp-store sales decreases in
TVs and entertainment hardware and
software. The company noted that the
low-double-digit comp-store sales
decline in TVs was driven by a lowdouble-
digit decline in unit sales and
moderating price declines.

The decline in TV unit sales was
driven primarily by weaker overall consumer
demand in the TV industry as
well as the digital conversion that occurred
during the second quarter of
fiscal 2010. The company also noted
that its online revenue increased approximately
16 percent in the second
fiscal quarter vs. the prior-year period.

Best Buy believes its domestic market
share declined 50 basis points
vs. the year-ago period, due to constrained
inventory during the initial
iPad launch, the continued decline in
entertainment software; and moderating
gains in home theater due to last
year’s digital conversion. — Additional
reporting by Steve Smith