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Best Buy’s Q2 Earnings Up 21%

Updated!Best Buy’s drive to cut costs and grow its online business was rewarded with a 20.7 percent increase in second-quarter profits and a 15-percent spike in share price after announcing the results this morning.

Net income of $198 million and flat revenue of $8.5 billion both exceeded forecasts for the three months ended July 30.

Sales were impacted by the consolidation of Best Buy’s Canadian business and unfavorable currency fluctuations, resulting in a 1 percent decline in international revenue, to $644 million.

In the U.S., revenue was essential flat at $7.9 billion and comp sales edged up 0.8 percent on relative strength in health and wearables, home theater, major appliances and computing (including tablets).

Putting the brakes on domestic business was weakness in mobile phones and gaming, and any lingering impact from the closures of 12 big-box and 22 Best Buy Mobile stores last year.

But as Wolfe Research analyst Scott Mushkin pointed out in a research note, “Comp sales remain stubbornly sluggish … but the bottom line is that a little comp in a low-margin business goes a long way.”

Broken out by category:

*appliances, up to 11 percent of the sales mix from 10 percent last year, saw comps increase 8.2 percent, on top of last year’s 20.7 percent gain

*CE, now 33 percent of the mix, from 32 percent, enjoyed a 4 percent comp increase on top of last year’s 7.3 percent gain

*Computing and mobile phones, which comprise the largest chunk of business at 46 percent of the mix, posted flat comps

Services, including extended warranties, product repairs and in-home support, continued its slump, albeit at a slower pace, with comps falling 7.2 percent on top of last year’s 13.1 percent decline.

Entertainment, including music and movie software, was the biggest loser, with comps falling 18 percent following last year’s 2 percent decline.

Services and entertainment are the smallest merchandising segments for Best Buy, with 5 percent of revenue each.

Online, however, is where the retailer shined. U.S. e-commerce revenue rose 23.7 percent to $835 million on increased traffic, bigger baskets and higher conversion rates, raising digital’s share of the pie to 10.6 percent of sales, up from 8.6 percent last year.

Domestic gross profit rate declined 60 basis points to 24 percent due to lower prices for services and constraints on high-margin digital imaging inventory following April’s earthquake in Japan.

“We are encouraged by the quality of our execution, the momentum in our business and the strength of our first half financial results,” said chairman/CEO and turnaround architect Hubert Joly. “We are excited by our mission to help customers live their lives and pursue their passions with the help of technology and the growth opportunities this mission creates for us.”

Looking ahead, the company continues to expect slight revenue growth in the second half due to new mobile phone introductions and a lift from holiday sales. Best Buy also raised its operating income expectations from flat growth to low-single digit gains thanks to ongoing cost reductions and increased efficiencies.

Observed Mushkin, “It’s hard to believe at this stage that this is a change in trajectory, but Q2 did come in slightly above expectations as did guidance for Q3. Best Buy has neutralized the price advantage from competitors and invested in its own online, logistics and data analytic abilities [and] has also moved to create a more exclusive and service-oriented business model.”

The strong results, together with a new connected-home demo house and a new wave of Sony hi-res listening stations, are a fitting birthday present to itself as Best Buy marks its 50th anniversary.