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Best Buy’s Q1 Sales Up, Profits Down

Minneapolis — Best Buy’s net earnings fell 15 percent to $153 million during its first fiscal quarter, ended May 30, as  net sales grew 12 percent to $10.1 billion.

Earnings were impacted by $25 million in restructuring charges related to changes in its store labor model and the reorganization of its European operations with Carphone Warehouse.

Excluding the charges, adjusted net earnings were essentially flat at $178 million for the quarter, beating analysts’ estimates.

Best Buy’s 12-percent sales gain was attributed to the addition of 185 new stores and the inclusion of revenue from Best Buy Europe, and were partially offset by a 6.2 percent decline in same store sales and unfavorable currency fluctuations.

“We believe the success of our company is based on our ability to build relationships with customers around the world,” said Brian Dunn, president/COO of Best Buy. Dunn succeeds Brad Anderson as CEO on June 24. “That begins with engaged employees, with a clear picture of how they can contribute to our story. Regardless of the environment we find ourselves in, we know that our people will continue to be our key point of differentiation in helping Best Buy grow. We believe this was the driving force behind our better-than-expected results in the first quarter.”

In the U.S., sales increased 1 percent to $7.5 billion for the quarter, aided by the addition of 115 new stores, while same store sales slipped 4.9 percent due to a decrease in store traffic and an essentially flat average ticket.

The company cited strength in notebook computers, mobile phones and repair services, which was offset by declines in gaming, digital cameras, appliances and movies. Comp sales of majaps and entertainment software each fell by more than 20 percent, the retailer reported, while flat-panel TV comps remained essentially unchanged, with higher unit sales offset by lower average selling prices.

Best Buy believes it grew its U.S. market share by 200 basis points as of April 30 as a result of store closings by competitors, new Best Buy locations, “solid store execution,” and strength in popular categories like notebook computers, mobile phones and flat-panel TVs, where the retailer “transitioned to new products faster than the competition.”
The share gains were greater than expected, CFO Jim Muehlbauer said in a conference call, and helped compensate for softer than anticipated CE demand.
Best Buy picked up increased share in March and April as Circuit City liquidated and new product lines were introduced, and the acceleration is expected to continue, the company said. Circuit’s dissolution was “something we’ve been very purposeful in planning for and, to be blunt, taking advantage of,”  Dunn said during the conference call.
Traffic trends were less volatile during the quarter, although comp sale declines rose in May due to tough comparisons with the year-ago period when consumers were flush with government stimulus checks, the company said.

Tight expense controls helped gross margin increase by 160 basis points worldwide and 70 basis points in the U.S., although margins are expected to moderate as the less profitable computer category continues to grow. Indeed, home entertainment increased from 31 percent to 35 percent of Best Buy’s domestic revenue mix year over year.

During the conference call, CEO-elect Dunn thanked Anderson for the vision to change Best Buy’s long-term strategy seven years ago from a product-driven focus to a customer and service focus, even while the company was at the top of its game.

Dunn also outlined the retailer’s four strategic priorities going forward: growing U.S. market share; providing consumers with connected digital solutions, ostensibly through Best Buy Mobile, Geek Squad and possible subscription models, including a forthcoming Napster promotion; growing its international business; and improving operational efficiencies.

Mike Vitelli, executive VP of Best Buy’s consumer operating group, said the greatest share gains came in categories where the company is “uniquely competitive,” such as flat-panel TV, mobile phones, computers, and, as the only national 12-volt chain, car A/V.

Despite diminished newspaper promotions following the departure of Circuit City’s national circular, the playing field remains highly competitive, Vitelli said, with regional chains, online stores and the mass merchant channel all vying for traffic. Best Buy is “being as aggressive as we need to be at all times,” he said, although vendors will likely seek more stable pricing following steep losses, and the company continues to see strong growth in higher-end categories like LED TVs. The latter offer “one of the more demonstrable changes” in TV since the advent of flat panel and high definition, he observed.

In response to a question about the digital broadcast transition, Vitelli noted the company sold 175,000 converter boxes last week, or seven times the usual rate. He said Geek Squad also fielded a high number of calls in advance of the changeover, and had received grants from the Federal Communications Commission (FCC) to provide consumers with free in-home set-up of the boxes.

Looking ahead, the company maintained its full-year forecast of revenue between $46.5 billion and $48.5 billion and comp sales flat to down 5 percent, given the “choppy macro environment” and limited visibility to consumer spending in the back half of the year, CFO Muehlbauer said.