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Best Buy Q2 Net Earnings Drop 27%

9/17/2002 09:22:00 AM Eastern

Minneapolis - A significant slowdown in comparable-store sales gains since July as well as the challenges of rapidly reducing expenses in its existing cost structure have resulted in a 27 percent decrease in net earnings for Best Buy in the retailer's fiscal second quarter.

However, Best Buy still posted a profit for the period with earnings of $62 million for the three months ended Aug. 31. This was down from the $85 million for the same quarter in 2001. As reported second-quarter sales - which combine the results of Best Buy, Future Shop, Magnolia Hi-Fi and Musicland - climbed 20 percent, to $5 billion, up from a pro forma $4.5 billion in the same three months last year. Comp-store sales for the second quarter, which don't include Future Shop, rose 2 percent.

'Comp-store sales appear to have stabilized at levels equal to that of last year,' said Brad Anderson, chairman/CEO. 'We expect contributions from new store openings and improved operating efficiency to improve profits in the second half of our fiscal year, which would come on top of the prior year's profit increase of more than 40 percent.'

For the fiscal year, Best Buy expects total sales of $22.9 billion, an increase of 17 percent over the previous fiscal year.

Pressure on Best Buy's gross profit margin, which decreased 30 basis points, to 22.5 percent in the second quarter, resulted from product mix shifts in Sam Goody stores, where sales of prerecorded music continued to decline and sales of lower-margin movie and gaming products increased. Declining margins in the retailer's home office category also contributed to the margin dip.

Overall selling, general and administrative (SG&A) expenses jumped 130 basis points in Best Buy's second quarter, reaching 20.5 percent. This increase was driven by the deleveraging impact of the modest comp-store sales gains as well as greater spending on outside services and other areas, said the company.

Best Buy's net loss in the first half hit $216 million, compared with net earnings of $140 million in the year-ago period. The main reason for the change was a non-cash impairment charge of $348 million.

Sales jumped 22 percent, to $9.6 billion in the first six months, compared with a pro forma $8.4 billion in the same six months in 2001. Comp-store sales in the first half rose 3.7 percent.

According to CFO Darren Jackson, Best Buy 'expects even comp-store sales in the third and fourth quarters of this fiscal year.' Jackson also said the retailer anticipates reductions in SG&A in the second half.