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Best Buy Revenue Rises 10%

Minneapolis — Best Buy reported a 10 percent gain in consolidated revenue during its fiscal second quarter, coming in at $6.7 billion, compared with $6.1 billion in the year-ago period.

The consumer electronics chain said the increase was driven by the opening of new stores and a comparable store sales gain of 3.5 percent.

The company’s U.S. Best Buy stores accounted for $6 billion in revenue during the three months, ended Aug. 27, up from $5.5 billion year-on-year, with comp-store sales gaining 3.8 percent. Sales reflected a higher average customer transaction in the quarter, compared with the prior year, while the transaction rise was due to consumer interest in larger-ticket products such as MP3 players, notebook computers and flat-panel TVs. This contrasted with fewer purchases of CDs and DVDs, which are lower priced.

The chain’s Magnolia Audio Video stores, which retail high-end CE products, recorded revenue of $33 million in the quarter, similar to revenue in the prior-year three months. Comp-store sales rose 3.5 percent.

Best Buy’s international segment, made up of Future Shop and Best Buy stores in Canada, recorded second-quarter revenue of $705 million, and a comp-store sales gain of 0.9 percent.

Consolidated Best Buy net earnings jumped 47 percent, hitting $188 million, up from a year-ago $127 million, as adjusted to reflect the impact of expensing stock-based compensation. Net earnings for the second quarter of last year, as reported, were $150 million.

Gross profit rose to 25.5 percent in the second quarter, up from 24.2 percent the prior year, driven by continued expansion of computer services and benefits from pricing and sourcing activities.

However, expenses climbed to 21.6 percent in the second quarter, compared with 20.8 percent in the previous year, including stock-based compensation expense. The expense increase was driven by operational costs associated with expanding the services business across the chain and using the customer centric operating model at more stores.

Best Buy reported the largest comparable-sales gains in MP3 players, flat-panel TVs, notebook computers and digital cameras, as declines in average selling prices for these products have continued to drive strong unit volume growth. Sales of these strong-sellers more than offset category declines in analog TVs, desktop computers, DVDs, CDs and telephones.

“To date, the increasing affordability of our key product categories and the strength of our retail team have enabled us to grow our business despite the macroeconomic factors such as rising gas prices,” said Brad Anderson, vice chairman/CEO.

Best Buy’s revenue mix in the second quarter reflected an increase for its CE product group, which represented 41 percent of total revenue for the three months, up from 38 percent a year earlier. CE products posted an 11.4 percent comp-store sales gain in the quarter, again leading the retailer’s results. Within this group, flat-panel TVs enjoyed triple-digit comp-store sales growth. Total TV comp-store sales grew by mid-single digits as digital TV gains more than offset declines in analog TVs.

The CE group also was supported by triple-digit comp-store sales gains from MP3 players, which benefited from increased assortment and availability, as well as by double-digit growth in digital imaging, reflecting expanded assortments and new displays. These results contrast with declines in comp-store sales for satellite TV systems and certain home audio products.

Home office products, Best Buy’s second largest group, accounting for 36 percent of second-quarter revenue, slipped 1 percentage point, from 37 percent year-on-year. The group reported a comp-store sales decline of 0.7 percent. Low double-digit comp-store sales increases for notebook computers reflected expanded assortments and interest in portable technology. Monitors and desktop computers posted comp-store sales declines.

The appliances group represented 7 percent of revenue in the quarter, the same as the previous year, and reported a comp-store sales gain of 10.9 percent. Leading the surge was high-single-digit comp-store sales gains for major appliances, reflecting an expansion of the retailer’s improved appliance assortments and labor model to more stores. A hot summer drove strong double-digit comp-store sales gains in air conditioning products.

Continued softness in the sales performance of new music and movies releases accounted for a 7.2 percent drop in second-quarter comp-store sales for Best Buy’s entertainment software group. This category accounted for 16 percent of revenue in the period, down from a year-earlier 18 percent. In a conference call, executive VP/general merchandising manager Ron Boire suggested that this category will be de-emphasized as the company moves toward a customer-driven, rather than a product-driven, business model that emphasizes customer retention, and that the company will “reflow” the entertainment software area in 100 test stores next quarter.

Best Buy enjoyed a second-quarter comp-store sales gain for customer centric or segmented stores, more than double the chain results. In addition, segmented stores delivered a higher operating income rate and operating income dollars, compared with last year.

Based on its ongoing success with segmented stores, Best Buy said it will convert a fourth wave of about 50 locations as early as this coming February. The retailer currently operates 187 customer centric stores, and a wave with 58 segmented units is expected to be completed by the end of October. The company anticipates beginning its next fiscal year, in March of 2006, with at least 350 segmented stores.

“We believe that this approach, which helps us engage with our customers differently, is essential to Best Buy’s success,” said Anderson. “In the coming years, more products will become digital and more homes will become networked. The increased complexity in the business will require more complex labor in our stores and additional services capabilities, which we are now building.”

During the conference call, senior executives noted that despite compressed pricing, the company is realizing higher margins through the use of price optimization programs; its private label offering (now standing at 400 SKUs); supply chain and direct sourcing initiatives; and increased consumer services, including a doubling of Geek Squad offerings. Best Buy currently has 9,400 Geek Squad agents and 950 custom installers.

For the six months, consolidated revenue rose to $12.8 billion, from $11.6 billion the previous year. First-half net earnings were $358 million, up from $219 million on an adjusted basis and $264 million as reported. Gross profit for the six months came in at 25.5 percent, up from 24.1 percent the previous year, while expenses were 21.6 percent, up from 21 percent, as adjusted, in the first half of last year.

For the back half of the year, Boyer said key sales drivers will include digital TVs and MP3 players, with projected triple digit comps; video gaming hardware and software, led by PlayStation2 and the forthcoming Xbox 360; plus notebook computers and appliances. Additional reporting by Alan Wolf