Best Buy Is Counting On Connectivity Growth

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— Best Buy sees broadband connectivity as its salvation through the recession and beyond.

Despite a lackluster retail environment in which TV revenue stalled and same-store sales slipped, CEO Brian Dunn pointed to Best Buy Mobile as the company’s “single-biggest profit driver” during its second fiscal quarter, and “the tip of the spear” in its connected world strategy.

Connectivity, he told analysts during an earnings call last week, has brought the CE industry to “a pivotal, transformational inflection point,” on par with the analog-to-digital transition that began 15 years ago.

“The customer wants to be connected all the time,” he said, “and we are a one-stop shop for all their connectivity needs.”

Much of Best Buy Mobile’s success stems from its higher mix of big-ticket smartphones and pricey data plans, as well as its ability to attach high-margin accessories and service plans, explained chief financial officer Jim Muehlbauer. (See Best Buy Mobile profile, Aug. 30, p. 24.)

Mobile sales should further accelerate in the second half when Best Buy begins selling smartphones online, added Mike Vitelli, Best Buy’s co-president/Americas.

But smartphone activations aside, opportunity also looms large in 3G and 4G wireless broadband for netbooks and tablet computers, high-speed broadband upgrades for the home, and cable and satellite TV services, all of which provide an attractive “bounty” for signing subscribers, Muehlbauer said.

Mobile broadband sales are “growing significantly,” Vitelli noted, while Dunn pointed to “very good growth” in TV and satellite sign-ups. “Fifty percent of people who buy HDTVs don’t have HD service,” Dunn explained, “and TimeWarner, Comcast and DirecTV are offered in 80 percent of our stores.”

To further its broadband agenda, Best Buy is remodeling its computer and home-theater sections to highlight home networking and faster download speeds, while the central CD and DVD departments will cede significant real estate to mobile, motion-control gaming and new e-reader sections.

Indeed, e-readers, motion and 3D gaming, tablet computers, and connected solutions like IPTV, combined with aggressive promotions, should bring back shoppers this holiday season, the executives said.

Pricing is expected to get especially competitive in video, where a dearth of deep discounting has left TV sales flat. “There’s a lot of pent-up demand by consumers and vendors,” Vitelli said. “Things will get more exciting promotionally in home theater in the second half.”

Dunn described consumer spending as “episodic,” with shoppers being “highly selective about when they spend money … They’re turning their wallets into justin- time mode.”

Muehlbauer said the “episodic traffic patterns” will likely continue in the second half, but described the holidays as the “biggest episode” of the year.

Vitelli added that this year’s sales surges have been tied more to product launches — such as those for iPad and new Android smartphones — than to traditional holiday periods, and that the forthcoming introductions of Xbox Connect, PlayStation Move and a spate of slate computers will provide the “episodic events” for the second half.

Meanwhile, the challenging environment was reflected in Best Buy’s domestic second-quarter sales figures, as revenue edged up 2 percent to $8.4 billion and comp-store sales declined 1 percent for the three months ended Aug. 28.

Nevertheless, net earnings soared more than 60 percent to $254 million company-wide due to better inventory management, reduced capital spending, a higher mix of high-margin connected products, and lower promotional costs, Muelhbauer said.

In a statement, Dunn said he was impressed with Best Buy’s performance “in a quarter with constrained consumer spending.”

Specifically, the company increased sales from connection solutions and attached connections at a low double-digit rate for customers purchasing connectable devices such as mobile phones, computers and TVs, which drove “a meaningful increase” in its domestic gross-profit dollar growth for the period.

The comp decline was driven primarily by reduced customer traffic, partially offset by an increase in average ticket. The domestic segment experienced a low double-digit compstore sales increase in mobile phones, a high single-digit comp-store sales increase in appliances and a mid-single- digit comp-store sales increase in mobile computers, which includes tablet computers.

These gains were more than offset by comp-store sales decreases in TVs and entertainment hardware and software. The company noted that the low-double-digit comp-store sales decline in TVs was driven by a lowdouble- digit decline in unit sales and moderating price declines.

The decline in TV unit sales was driven primarily by weaker overall consumer demand in the TV industry as well as the digital conversion that occurred during the second quarter of fiscal 2010. The company also noted that its online revenue increased approximately 16 percent in the second fiscal quarter vs. the prior-year period.

Best Buy believes its domestic market share declined 50 basis points vs. the year-ago period, due to constrained inventory during the initial iPad launch, the continued decline in entertainment software; and moderating gains in home theater due to last year’s digital conversion. —

Additional reporting by Steve Smith


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