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Best Buy’s Q3 Earnings Nearly Double

Minneapolis – Ongoing cost reductions, tighter expense management and a slim sales gain helped Best Buy post a 98 percent increase in third-quarter profits, to $107 million.

Net revenue edged up 0.6 percent to $9.4 billion and comp store sales increased 2.2 percent for the three months ended Nov. 1.

But excluding the drag from international operations, which were impacted by store closures in China and Canada and unfavorable currency fluctuations, the business shined.

U.S. revenue rose 2.3 percent to $8 billion and comps increased 3.2 percent, aided by an accounting change that reflects mobile carriers’ new installment billing plans.

The gains were more dramatic online, where revenue hit $601 million and comps increased 21.6 percent thanks to larger average transactions, increased traffic driven by a bigger digital marketing spend, and improved inventory availability stemming from a ship-from-store option that was made available chainwide in January.

President/CEO Hubert Joly said the company’s comp gains outpaced the CE industry, and attributed the outperformance to “our strength in televisions, computing, and tablets … in addition to our growth in gaming and appliances.”

Specifically, CE comps increased 3.1 percent from a year-ago decline of 2.5 percent, and movie, music and gaming comps climbed 16.6 percent from a year-ago drop of 26.8 percent.

Best Buy also showed comp gains in appliances, up 5.7 percent, and the overall computing and mobile phones category, up 3.2 percent, both against tougher prior-year comparisons.

But the company acknowledged comp declines in mobile phones and tablets, and also lost ground in services, a high-margin category that includes extended warranties and home installations under the Geek Squad brand. That business showed a 10.3 percent comp sale decline.

The gross profit rate slipped 50 basis points to 23 percent in the U.S. due to price promotions, particularly in accessories and tablets, and a lower gross profit rate in the mobile business, including continuing declines in demand for standalone mobile broadband products.

The chain also attributed the drop to increased revenues in the lower-margin gaming category.

Looking to the holidays, Joly said the company is excited about its plan, which includes six key initiatives:

  • – Customer-facing changes made online and in stores that touch many core categories, especially home theater, accessories, appliances, digital imaging, and emerging categories such as health and wearables and connected home;
  • – An upgraded system that allows Best Buy Mobile to activate carriers’ new installment billing plans;
  • – A more “inspirational” gifting strategy;
  • – A more “defined, structured and analytical approach” to the retailer’s promotional strategy and competitive response plans;
  • – More relevant and targeted marketing investments, including the more concisely stated tagline of “Expert Service. Unbeatable Price,” and;
  • – Increased inventory availability due to an expanded ship-from-store capability now at 1,400 stores, versus 400 stores last year.

Chief financial officer Sharon McCollam tempered fourth-quarter expectations by citing possible headwinds coming from multiple directions, including:

  • – Potential supply chain disruptions due to labor unrest at West Coast ports;
  • – Possible shortages on popular, recently-launched products, ostensibly iPhone 6 and 6 Plus;
  • – An intensely promotional competitive environment;
  • – A greater mix of lower-margin products and higher growth online, which McCollam described as a lower-margin channel;
  • – Intensified investments in customer-facing initiatives, and;
  • – Higher incentive compensation, particularly at the store level, for improved performance.

Nevertheless, investors took the better-than-expected Q3 results and ran with them, driving Best Buy’s share price up more than 6 percent in pre-market trading this morning.

All told, the company is projecting flat revenue and comp sales, but a higher gross profit rate in the fourth quarter, McCollam said.