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Best Buy’s Q2 Sales Up 12%; Earnings Fall 19%

9/16/2008 09:51:00 AM Eastern

Minneapolis, Minn. — Higher spending on strategic initiatives like Best Buy Mobile, and strong sales of lower margin products like notebook computers and video game consoles, led to a 19 percent drop in Best Buy’s second fiscal quarter net earnings.

Nevertheless, sales for the three-month period ended Aug. 30 rose 12 percent to $9.8 billion and same store sales increased 4.2 percent as the revenue mix continued to shift toward bigger ticket items like flat panel TVs, notebook PCs and advanced mobile phones.

“We believe our strategic indicators remain strong,” said Brad Anderson, vice chairman and CEO. “Customers are noticing and appreciating the changes we’ve made in our shopping experience. Yet we have some work to do in terms of managing our expenses amid a challenging macro economic environment. We plan to continue our growth investments and reduce our lower-priority spending in order to continue our customer support in the second half.”

Brian Dunn, president/chief operating officer, added, “In a challenging environment that finds many of our competitors retrenching, we are growing and opening more new stores. We believe it’s prudent for strong companies to distance themselves from their competitors during tough times. We know that when the world’s most resilient economy rebounds, we’ll be well positioned to benefit from it.”

Best Buy’s selling, general and administrative expense rate (SG&A) increased to 20.8 percent of revenue, up from 19.9 percent during the year ago period, as the company built and staffed up its Best Buy Mobile shops; hired more associates for the back-to-school period; reset its GPS sections; added musical instrument departments and Apple in-store shops; and increased spending on international expansion.

Domestically, revenue rose 12 percent to $8.1 billion and same store sales increased 5.3 percent during the second quarter, while operating income fell 12 percent to $315 million.

The comparable store sales gain was driven by flat-panel TVs, notebook computers, mobile phones and video gaming, and reflected an increase in the average transaction amount, Best Buy said. The higher average ticket was offset in part by a decline in customer traffic. The company estimated that its U.S. market share rose to a record high of nearly 22 percent in the first calendar quarter of the year, led by gains in the PC and TV categories.

On the product front, home office led the domestic revenue growth for the second fiscal quarter. The category, which accounted for 34 percent of revenue, had a 15.1-percent comp store sales gain. A double-digit comp increase for notebook computers fueled the growth, which Best Buy attributed to its wide assortment and customer service. Mobile phones and accessories experienced a nearly triple-digit increase in comps and a strong double-digit gain in wireless connections, led by the chain-wide expansion of Best Buy Mobile. These gains were partially offset by expected comp sale declines in printers and landline phones.

The services category accounted for 7 percent of second-quarter revenue and increased 8.7 percent on a comp store sales basis. A double-digit gain in home theater services, a high single-digit gain in computer services and mid single-digit increase in warranty comps drove the improvement.

Consumer electronics, which represented 38 percent of revenue, posted a 2-percent comp gain. The company enjoyed double-digit comp increases in flat-panel TVs and GPS products, while the total TV category posted a low double-digit comp sales gain. Projection and tube televisions experienced a strong double-digit comp sales decline following Best Buy’s exit from the direct view category and as consumers continued to opt for flat-panel technology. MP3 players showed a low single-digit comp sales decline, while digital imaging experienced a low double-digit decline.

Entertainment software, which comprised 16 percent of second-quarter revenue, was flat year-over-year on a comp sales basis. A double-digit gain in video gaming comps was supported by strong sales of consoles, which offered better in-stock levels and “attractive” pricing. This gain was offset by continued, anticipated declines for CDs and DVDs.

Appliances, which totaled 5 percent of second-quarter revenue, had a comp decline of 9.8 percent. This decrease was driven by a low double-digit decline in majap comps amid an industry-wide downturn, partially offset by an increase in average selling prices year over year. Despite negative industry trends, Best Buy estimates that it increased its market share in appliances due to “increased customer interest in high-end appliances and a well-trained sales force.”

The company opened 24 U.S. Best Buy stores during the quarter, including five of its 45,000-square-foot stores, 18 of its 30,000-square-foot stores, and one of its 20,000-square-foot stores. At the end of the second quarter, the domestic segment included 973 Best Buy stores, 21 Best Buy Mobile stand-alone stores, seven Geek Squad stand-alone stores, 13 Magnolia Audio Video stores and 22 Pacific Sales showrooms.

In a conference call, executives said inventory levels are up 10 percent over the comparable period in 2007, as last year’s levels going into the holiday season were too low. The company is bulking up on PCs, mobile phones and flat panel TVs, they said.

According to Mike Vitelli, customer operating group executive VP, TV margins declined during the first quarter, due in part to Best Buy’s use of extended financing promotions, although the company enjoyed a “significant improvement” in warranty and installation attachment rates.