Despite Best Buy's participation in a highly promotional marketplace, yet aided by cuts in expenses, the retailer managed to post a 5 percent increase in earnings in its fiscal third quarter, climbing to $85 million, compared with $80 million in the year-ago period.
However, Best Buy paired back its earning expectations for the fourth quarter from previous guidance, reducing earnings per share expectations by 5 cents, due mainly to an anticipated $80 million to $85 million operating loss at the chain's Musicland stores. Best Buy also said it is reassessing all of its Sam Goody mall locations, based on the revised trends, with intentions of scrutinizing under-performing locations.
Best Buy third quarter sales, as reported, increased 16 percent, hitting $5.5 billion, up from $4.8 billion in the same three months last year. Comp-store sales declined 0.4 percent, compared with a 1.6 percent gain in the same quarter in 2001.
"While comparable store sales declined modestly at the start of December, [our] strong finish in November, and the gains at Future Shop [stores], give us confidence in our outlook. [This would be] flat comparable store sales for the fourth quarter, despite the strong sales performance in last year's quarter," said Brad Anderson, vice chairman/CEO.
Gross profit margin at Best Buy in the third quarter, ended November 30, was unchanged at 21.6 percent, compared with the third quarter of 2001. Flat margin comparisons benefited from an increase of higher margin digital products as a percentage of the overall sales mix in the third quarter. This reached 23 percent, up from 17 percent in the same quarter last year. The digital percentage is expected to approach 25 percent of the total mix in the fourth quarter.
A shift to more consumer electronics and fewer home office products also helped boost the gross profit percentage, while the significantly more intense promotional environment, and the fact the retailer derived less of its sales from higher margin mall-based locations, tended to eat into the gross profit rate.
"We were pleased to keep our gross profit percentage equal to last year's increased rate despite the more intense promotional environment and increased commoditization of our products," continued Anderson. "Our success is due to our ability to shift our product mix toward higher margin products and to increase the attachment rate of accessories."
Selling, General and Administrative (SG&A) expenses increased 10 basis points in the third quarter, to 19 percent, due mainly to inclusion of results from Best Buy's international segment, offset by curtailed spending in domestic SG&A.
Looking ahead to the fourth quarter, Best Buy expects an overall 10 percent increase in sales, to $7.7 billion, with modest growth in comp-store sales at Best Buy and a high-teens comp-store decline at Musicland. Overall comp-stores sales for the fourth quarter should equal the numbers of last year's three months.
The retailer anticipates total fiscal-year sales of $22.8 billion, up 16 percent year over year. However, the heightened promotional activity and lower contribution from mall-based stores is expected to drive down gross margin by 110 basis points in the fourth quarter.
For the nine months, Best Buy sales climbed to $15.1 billion, up 20 percent from the $12.6 billion recorded in the same period last year. The sales increase reflects the addition of 68 new Best Buy stores in the past 12 months as well as the acquisition of Future Shop. Comp-store sales for the nine months climbed 2.2 percent, up from a 0.6 percent increase year-on-year. Gross profit remained the same at 22.4 percent, while SG&A climbed 50 basis points, to 20 percent.
Net loss for the nine months was $131 million, compared with a net profit of $220 million in the same period last year. The main cause of the earnings decline was a non-cash impairment charge of $348 million, after-tax.