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Best Buy: Why Comps, Profits Sank In Quarter

12/02/2012 07:00:00 PM Eastern

MINNEAPOLIS — Best Buy attributed its poor third-quarter performance to store closures and lower comp sales but said the rate of operating income decline would ease this season.

The earnings results, though softened by a preannouncement in October, were still ugly: a $10 million net loss, a $13 million loss from continuing operations compared with a year-ago gain of $173 million; and a 97 percent drop in operating income.

Net sales slipped 3.5 percent to $10.8 billion for the three months, ended Nov. 3, and compstore sales declined 4.3 percent.

The results drove Best Buy’s share price down to a 14-year low, and prompted credit downgrades from two ratings agencies. Recently installed president/CEO Hubert Joly acknowledged that the company’s third-quarter financial performance, in line with trends of the last three years, was “clearly unsatisfactory … and only strengthen our sense of urgency and purpose.”

On an earnings call following the announcement, Joly and outgoing chief financial officer Jim Muehlbauer said profits were also impacted by singular events like tough year-over-year comparisons in mobile phones; increased sales of smaller, lower-margin TVs; and severance payouts to senior executives.

Also adding to the overhead were higher costs for enhanced training and performance bonuses for Blue Shirt sales associates.

Within the U.S., third-quarter revenue fell 4.7 percent to $7.7 billion and compstore sales dipped 4 percent, as gains in mobile phones, tablets, e-readers and majaps were more than offset by declines in notebooks, gaming, digital imaging and TV.

Online sales rose more than 10 percent to $431 million.

U.S. operating income fell 80 percent to $50 million, and gross profit declined 9 percent to $1.9 billion, reflecting a low-margin mix of mobile phones and TVs, as well as a pause in tablet and notebook purchases as consumers awaited key fall product launches.

On the conference call, outgoing president U.S. Mike Vitelli said the improved training and incentives for Blue Shirts, as well as their expanded authority to match prices, have increased their sense of “empowerment and customer engagement” as the company enters the all-important holiday selling season. The new operating model, borrowed from Best Buy Mobile, is expected to yield “positive results” in Q4, he said, which would help offset the higher investment.

However, the executives wouldn’t quantify the possible negative impact of price matching on gross margin rate, citing the newness of the policy and the company’s already competitive product pricing.

Muehlbauer and Vitelli added that the same new product introductions that delayed consumer purchases in the third quarter and impacted comp sales, such as Windows 8 and a slew of new tablets and smartphones, should help fuel holiday revenue.

Looking ahead, Joly pointed to the company’s “Renew Blue” initiative, unveiled last month at an investors’ conference, which he described as “a set of priorities to begin reinvigorating the company’s performance and rejuvenating Best Buy.”

Joly added that he’s pleased with the progress that’s been made in his 11 weeks on the job, which includes a new management team and a framework for a turnaround.

“I’m excited by the opportunity to turn around Best Buy,” he said.

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