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Best Buy Q1 Profits Down, U.S. Sales Up

Updated! Minneapolis — A year-ago tax benefit and weak international results contributed to a 72 percent decline in Best Buy’s fiscal first-quarter net earnings, to $129 million.

Net sales slipped 0.9 percent to $8.6 billion as unfavorable currency fluctuations and disruptions in the Canadian market offset modest U.S. gains.

Despite the downturns – which largely reflected a one-time earnings boost from a $353 million tax benefit last year – Best Buy’s results surpassed analysts’ expectations, sending shares up over 8 percent this morning.

Excluding the year-ago tax benefit, non-GAAP profits rose 6.5 percent to $131 million for the three months ended May 3.

In the U.S., continued growth in major appliances, a strong product cycle for large-screen TVs and flagship phones, and an improving “multichannel customer experience” led to better-than-expected performance, reported president, CEO and chairman-elect Hubert Joly.

 “We have made real progress and it is showing up in our results,” he said, noting that the company’s new mantra of “Advice, service and convenience at competitive prices” continues to resonate with customers.

U.S. revenue increased 1.4 percent, representing the third consecutive quarter of growth, and comp sales edged up 0.6 percent including the benefit of mobile phone installment billing, but slipped 0.7 excluding the carriers’ new payment plans. Gains in TVs, mobile phones and majaps were more than offset by declines in tablets and computing, and the company was unable to reverse its slumping services segment, where comps declined 10.3 percent on lower extended warranty attachments and fewer mobile warranty claims.

Joly said the comp decline still beat the industry’s 5.3 percent drop in CE sales year-over-year (excluding mobile, gaming and entertainment) as reported by The NPD Group, and reminded investors that the CE business “is subject to product cycles,” and that Best Buy is positioning itself “to capitalize on key technology waves and customer-experience opportunities.”

On an earnings call, he said a primary opportunity lies in the connected home, which he described as an area of intense strategic focus. “A few years ago you had a PC, you had a CRT TV and a nice stereo system. Now, everything is connected, which provides opportunities for us,” he told analysts. “There’s a gap between what customers understand they can do with technology and what technology can do. So we are there to close these gaps.”

Joly also indicated that the company considers services, particularly in-home, a crucial retail differentiator that can drive sales, profits and customer loyalty. To that end, “We are in the midst of a multi-year transformation of our services activities that entails significant work around our service offerings, capabilities, processes, tools and systems across all customer touch points,” he said.

For the online channel, increased traffic and higher close rates led to a 5.3 percent hike in comps, although growth slowed considerably from last year’s 29.2 percent gains due to the slowdown in tablet and computing, which have high online penetration.

Expenses rose 20 basis points, or $35 million, as the company invested in “future growth initiatives” and higher incentive pay.

Offshore revenue declined 22.1 percent to $668 million due to the negative impact of foreign currency exchanges, disruptions in the Canadian market as Best Buy consolidated operations there, and ongoing softness in that country’s CE industry.

Looking ahead, chief financial officer Sharon McCollam projected flat to negative low-single-digit revenue growth and a 30- to 50-basis point decline in operating income for the current quarter.