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Best Buy U.S. Stores Revenue Jumps 10%

6/14/2005 11:25:00 AM Eastern

Minneapolis — Elevated primarily by a higher ticket average, sales at Best Buy U.S. stores increased 10 percent, to $5.5 billion in the retailer’s fiscal first quarter, from $5 billion, while U.S. domestic locations tacked on a 4.5 percent comp-store gain in the three months.

Operating income for the U.S. domestic stores in the first quarter, ended May 28, increased to $242 million. That is up from a year-on-year adjusted $156 million, with operating income as a percent of revenue rising to 4.4 percent in the quarter, compared with a year-earlier adjusted 3.1 percent.

Gross profit as a percent of revenue for domestic stores, comprised of U.S. Best Buy and Magnolia Audio Video operations, climbed to 25.7 percent, from 24.1 percent. Expenses rose to 21.3 percent, from an adjusted 20.9 percent.

“We are extremely pleased with the first-quarter results, which exceeded our expectations on several dimensions, including revenue growth, the gross profit rate and results at stores converted to our customer-centric operating model,” said Brad Anderson, vice chairman/CEO. “The common denominator was outstanding execution by our employees, who continue to drive the transformation of our business model.”

Best Buy’s overall numbers, boosted by both new-store openings and comp-store sales gains, showed a 12 percent rise in quarterly revenue, to $6.1 billion, from last year’s $5.5 billion. This consolidated sales figure includes a $30 million revenue gain at Magnolia Audio Video, and comp-store increase of 1.4 percent, and anincrease in Canada’s Future Shop and Best Buy store revenue, to $626 million, from a year-ago $499 million, accompanied by a 3 percent com-store sales gain.

Consolidated Best Buy earnings in the first quarter nearly doubled, to $170 million, up 85 percent from an adjusted $92 million in the same period in 2004. Gross profit as a percent of revenue rose to 25.5 percent, from 23.9 percent, due to a more modest promotional environment, improved product model transitions and supply chain benefits related to pricing, global sourcing and private-label initiatives.

Compared with the previous year, the retailer’s gross profit rate also benefited from an increase of higher-margin services in the revenue mix and the conversion of more stores to a customer-centric operating model.

Expenses, however, increased to 21.6 percent of revenue in the first quarter, compared with an adjusted 21.2 percent the prior year, driven by planned investments in accelerating customer centricity, a higher mix of services and an increase in costs associated with store relocations.

Best Buy reported that stores converted to the chain’s customer-centric operating model last October continued to deliver twice the comp-store gains, and a higher gross profit rate, when compared with other U.S. Best Buy units.

Best Buy reported the largest increase in customer spending during the first quarter was on MP3 players, digital TVs, video games, digital cameras and notebook computers. These strong-selling categories more than offset declining sales in desktop computers, analog TVs and cellular phones, said the retailer.

The consumer electronics group continued to dominate chain revenue in the first three months, increasing revenue share to 40 percent, from 38 percent year-over-year, and posting a high-single-digit comp-store sales gain for the three months.

Within the CE group, digital TVs enjoyed strong double-digit comp-store sales growth, resulting in unit increases that more than offset lower average selling prices. The retailer benefited from resetting of U.S. Best Buy stores’ digital TV departments last fall, which offered an expanded assortment and new, “more effective” displays.

Total television comp-store sales grew by high-single digits as digital TV gains were partially offset by declines of analog TVs.

The CE segment continued to be supported by triple-digit gains in comp-store sales of MP3 players, which benefited from better in-stock levels, and double-digit growth in digital imaging, reflecting expanded assortments as well as new displays installed last fall. Results in strong growth areas were partially offset by declines in comps for satellite TV systems and certain audio products.

Home office products, Best Buy’s second largest category, at a 34 percent revenue share, reported a modest comp-store sales gain for the first quarter, but saw overall revenue share still decrease from 36 percent in the first quarter of last year. Low-double-digit comp-store sales increased for notebooks reflected expanded assortments and more effective displays. These results were partially offset by comp-store sales declines in monitors, desktops and cellular phones.

The entertainment software group remained steady with a 20 percent share of revenue, while comp-store sales rose slightly in the first quarter. The segment recorded double-digit growth in video gaming products, driven by the launch of Playstation Portable. This was offset by comp declines in revenue from DVDs and CDs

The retailer’s appliance segment held fast with 6 percent of quarterly revenue, and reported a modest comp-store sales gain for the first quarter. Product growth was led by mid-single-digit comp-store sales increases in major appliances, reflecting an expansion of the company’s improved majap assortment and labor model to more stores.

“The customer-centric cycle now is how we do business,” explained Anderson, “and that work is so much broader than simply the segmented stores.

“Consumers are responding well to the change in how our employees engage with them and suggest solutions that fit their individual lifestyle,” said Anderson. “Moreover, we continue to improve in our execution of the new business model. This work is driving changes in everything from our supply chain to our service offerings to our marketing programs. While making such sweeping changes is difficult, we believe it helps differentiate Best Buy in the marketplace.”

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