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Best Buy Q2 Sales Driven By Home Theater, PCs

Minneapolis — Best Buy reported improved margins in home theater and stronger computer sales during its fiscal second quarter, which generated double-digit gains in net earnings and revenue.

The chain reported net earnings of $250 million in its fiscal second quarter, a gain of 17 percent, and a 15 percent revenue gain to $8.8 billion during the quarter vs. the previous year.

The increase in revenue for the quarter, ended Sept. 1, was due to new U.S. store openings, strong growth in the international segment and a comp-store sales gain of 3.6 percent companywide. Domestic comp-store sales gain was 1.7 percent compared with the international comp-store sales gain of 16.3 percent.

Best Buy said net earnings were led by its performances in computing, home theater and video games. Operating income grew 22 percent driven by revenue growth and a 25-basis-point improvement in the operating income rate for the second quarter.

The fiscal second-quarter increase was reflected in the net addition of 113 new stores in the past 12 months and a comp-store sales gain of 3.6 percent for the second quarter. Comp-store sales gain was lead by notebook computers, flat-panel TVs and video games. Total second-quarter online revenue grew more than 20 percent vs. the same time last year.

Operating income was $401 million for the fiscal second quarter, which represents a 22 percent improvement, compared with operating income $330 million for the same time last year.

In a prepared statement Darren Jackson, Best Buy’s executive VP of finance and chief financial officer, commented, “We are navigating well in the challenging consumer environment. We’re very pleased to see operating income rate expansion for the quarter, including less deterioration in the U.S. gross profit rate.”

Domestically, U.S. Best Buy, Geek Squad, Pacific Sales and Magnolia Audio Video results reported second-quarter operating income of $358 million, an increased of 8 percent vs. the prior year’s period.

The quarter’s domestic revenue was $7.2 billion, an increase of 9 percent. The revenue increase included the opening of new stores, a comp-stores sales gain of 1.7 percent and the acquisition of Speakeasy, a broadband voice, data and IT service provider to small business. Pacific Sales, a retailer of high-end home improvement products, had revenue of $73 million during the quarter and a modest comp-store sales decline due to a soft housing market. Domestic online sales were up 22 percent, the company reported.

During an analysts’ conference call discussing the fiscal second quarter this morning there were comments on Best Buy’s performance with specific categories. Mike Vitelli, senior VP of the home solutions group, said home theater margins increased in the quarter due to “installation, DirecTV, next-generation DVD [players], gaming and audio. Home theater margins would be up without [installation] services, but [with those] services and offering variable solutions … consumers can make knowledgeable decisions.”

Dave Morrish, senior VP of the PC mobility group, said that computer business also benefited for service and installation. “There was strong growth in computing [during the quarter] in desktops and notebooks with consumers responding to [product] offerings and Geek Squad service … while some [competitors] saw softer sales.”

He added that the Apple program in Best Buy stores has increased computer sales overall at the chain. “The overall level of customer satisfaction strength in Mac side and has spilled over to the Windows side.” And he noted that the interplay between Best Buy and Apple personnel has helped the project’s overall development. Apple departments are now in 200 stores and Best Buy’s target is for 270 locations by the end of the calendar year.

By category, CE sales were 38 percent of the company’s business, down 3 percent vs. the previous year. Comp-store sales in CE were down 1.6 percent. Aside from flat-panel TV and home theater, mobile navigation products delivered triple-digit comp-store sales gains.

Home office sales had a 31 percent share, a 2 percent gain. Comp sales in home office rose 9.8 percent. Strong notebook computer sales drove the performance in the quarter, with the chain working “with manufacturers to create offerings that appeal to consumers’ growing interest in new ways,” the company said.

Entertainment software remained at a 16 percent share, with a comp-store gain of 9.3 percent, due to increases in video game sales that offset declines in CDs and DVDs.

Appliances’ share for the quarter was 8 percent, a 1 percent gain. Comp-store sales in majaps were down 7.1 percent due to the slow U.S. housing market.

Services, which have been broken out for this report, remained steady at 6 percent share with comp-store sales up 5.3 percent. That includes extended service contracts, revenue from services (computer, home theater and mobile audio related), product repair revenue, delivery and installation.

The double-digit gains in computer and home theater services was driven by attachments to the sales of notebook computers and flat-panel TVs as well as effective promotions.

Fees from cardholder account activations are 1 percent of the company’s revenue mix, the same as last year.

When asked about the promotional atmosphere for the holiday season, Jim Muehlbauer, chief financial officer of U.S. operations surprisingly said, “What we’ve heard from vendors and customers… we will have a more rational promotional environment [compared to last year]. There is a long way to go yet, but from a competitive standpoint there will be less retail space, less stores from CompUSA and Tweeter.”

Morrish added that in PCs last year there was the Vista operating system delay, “But now there is a more a more rational cycle for the PC business. More consumers are trading up to Vista’s features and benefits,” which should help boost holiday sales.