Best Buy's Dunn Says Growth Plan On Track

By Alan Wolf On Jun 20 2011 - 4:01am




MINNEAPOLIS – Shrugging off expected firstquarter profit and comp-sale declines, Best Buy CEO Brian Dunn is pointing instead to market share gains in critical categories as validation of the company’s strategic initiatives.

Key barometers for the three months, ended May 28, included double-digit growth in e-commerce, tripledigit increases e-reader sales, and a 28 percent surge in wireless revenue, which helped generate more than a billion dollars in operating cash flow, he told analysts last week during an earnings call.

Investors apparently agreed, sending Best Buy shares up more than 4 percent that day. Wall Street was also enthused by the company’s $505 million in stock buybacks and a full-year revenue projection that’s leaning toward $52.5 billion, and forgave the 12 percent decline in first-quarter profits that was partly due to targeted price promotions in pursuit of share.

“Best Buy’s Q1 was slightly ahead of expectations … and should bode well as comparisons start to ease from here,” Credit Suisse retail analyst Gary Balter observed in a research note. “Q1 results showed better sales than Q4, good expense management, and a very strong balance sheet.”

To keep the momentum going, the retailer will press on with a full spate of online, in-store and merchandising initiatives that were first detailed in April (see TWICE, April 18, p. 4) and which are beginning to bear fruit, Dunn said.

In e-commerce, a critical battlefield where its most worrisome competitor Amazon.com plays, the company is still determined to double its business within the next three to five years. To that end, it has added more than 10,000 SKUs to BestBuy.com since the first quarter of 2010 and, according to co-Americas president Shari Ballard, invested in price promotions around computing, digital imaging and portable electronics during the first quarter that succeeded in goosing sales and growing share.

“You will continue to see us do that,” she told analysts. We have not obviously closed all the competitive gaps that we want to close, but we’re making good progress.”

In wireless, perhaps the most hotly contested category, Dunn said Best Buy “significantly” increased its smartphone share during the quarter, aided by a Lady Gaga CD promotion; opened 20 new stand-alone Mobile stores for a total of close to 200; and has expanded the size of its big-box mobile departments in 600 locations to date.

Best Buy also performed 4 million “upgrade checks” of customers’ wireless subscriptions during the quarter — compared with 9 million during all of last year which provides new sales opportunities, and is positioning itself through marketing as “the home of 4G.”

The company is also taking an aggressive stance in tablet computers by creating a Tablet Central zone within its computing department. The zone, which was launched last month and will reach all stores by July, is based on the Best Buy Mobile model of a one-stop shop that offers a wide selection of models, accessories and subscription services. Tablets are also being sold within the standalone Mobile stores, which draw a higher percentage of female shoppers and first-time customers.

“We’ve been able to sell virtually everything that we’re getting as this category continues to generate excitement,” noted co-Americas president Mike Vitelli.

Also merchandised within Tablet Central are e-readers, a relatively small category in overall dollars, but whose growth was strong enough to meaningfully benefit Best Buy’s overall domestic comp sales, said chief financial officer James Muehlbauer.

He also pointed to highly profitable subscription services as an important proxy for the company’s “connected world” strategy. Best Buy is on track to reach its currentyear goal of 10 million connections, up from 8 million last year, as growth in postpaid mobile phone, mobile computing and TV content subscriptions drove a 20 percent increase in first quarter connections.

In gaming, the chain is rolling out a dedicated trade-in desk for pre-owned games with an adjacent pre-order touch screen. Game exchanges and sales of pre-owned titles have improved by a ratio of 2:1 at stores with desks, Dunn said, and customers are spending about half the value of the gift cards they receive for their trade-ins in other sections of the stores.

Gaming, along with mobile computing, was also largely responsible for the quarter’s sequentially better comps, Muehlbauer said.

Still, not all cylinders were firing during quarter. Despite increased demand for larger screen sizes, TV comps were down by the high-single digits and the company has only “modest expectations” for the category this year, Vitelli said. Also, both Best Buy and the industry were impacted by digital camera component shortages due to the recent events in Japan, leading to a sales shortfall in that category, although product availability is expected to improve in the back half of 2011.

On the store front, the company has made “good initial progress” towards its goal of reducing its big-box square footage by 10 percent over the next three to five years, Muehlbauer said. To date, Best Buy has subleased space in less than 50 stores, and will also have an opportunity to reevaluate a large number of locations over the next three to four years as lease renewals come up.

Inside the stores, Ballard said Best Buy is improving its product and sales training for associates; removed certain non-customer-facing positions to pay for the new gaming department staff; and is seeing good initial results from a new compensation model, in place in 30 Connected-format pilot stores, that’s based on product knowledge, customer ratings and productivity.

Looking ahead, Best Buy believes the environment will continue to be difficult for consumers and competitive for the industry, and plans to keep up its targeted multichannel promotions in categories “where the customer goes,” Muehlbauer said.

Added Dunn: “Our ability to create compelling offers that cause customers to respond shows that our operating model has elasticity and that we are truly selling products and services at values consumers can’t pass up.”

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