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Best Buy’s Q2 Profits Rise 22%

Minneapolis, Minn. – Best Buy’s net profit rose 22 percent to $230 million for its fiscal second quarter ended Aug. 26 on net sales of $7.6 billion, up 13 percent from the year-ago period.

Earnings gains were driven by lower expenses, growth in high margin areas like private label products and computer services, and supply chain improvements and other productivity gains. The gross profit rate fell 50 basis points to 25 percent, due largely to increased promotions for DVDs and notebook computers.

Revenue growth was fueled by the addition of 237 new stores over the past 12 months, including the recent acquisitions of Pacific Sales Kitchen & Bath Center, with 14 showrooms, and China’s Jiangsu Five Star Appliance Co., with 131 stores.

Minus the additions, same-store sales grew 3.7 percent company-wide and 3 percent in the United States.

Domestically, operating income rose 28 percent to $328 million and net sales grew 10 percent to $6.6 billion for the quarter, bolstered by a 35 percent increase in online revenue and contributions of $78 million from Pacific Sales and $33 million from the Magnolia Audio Video chain. Magnolia’s comparable store sales rose 2.9 percent.

On the product front, flat panel TVs enjoyed triple-digit comp store gains due to an improved assortment in larger screen sizes, the addition of 55 Magnolia Home Theater in-store shops, and higher unit sales as prices declined. Conversely, comparable store sales of tube and projection TVs declined.

In PCs, sales of notebooks and computer services enjoyed double-digit comp store gains, while comp sales of printers and notebook computers declined.

Majaps also took it on the chin, with comp store sales falling 2.6 percent for the period due to the cooling housing market and a promotional environment. Nevertheless, the category now represents 8 percent of Best Buy’s sales mix, up from 7 percent a year ago, and 75 percent of the company’s appliance departments have been trained in a new selling model dubbed appliance customer expert (ACE).

By quarter’s end, the company was operating 771 Best Buy stores (162 with Magnolia shops and 173 with Best Buy For Business capabilities); 20 Magnolia stores; 14 Pacific Sales showrooms; and 12 freestanding Geek Squad stores in the U.S. It also employed 1,900 home theater installers and 310 Microsoft-certified PC technicians.

Going forward, Best Buy plans to add 200 Magnolia shops and 120 Best Buy For Business areas, mostly in the third quarter. The company will also update 263 TV departments with a new home theater display format code-named HEET (Home Entertainment Experience Transformation), which features a prominent flat-panel wall, faux wood fixtures, unobstructed sight lines and a consultation area. Other elements include live high- and standard-definition feeds to demonstrate the difference to shoppers; a home installation display with a cut-away wall; a greater number of complete home theater systems; and stand-alone racks for receivers that allow shoppers to examine their back panels.

The company will also bow a new “HD Done Right Pledge,” to be touted in forthcoming TV spots, which will provide a $400 discount on TVs 37-inches and larger that are installed by Best Buy.

The efforts reflect Best Buy’s laser focus on home theater — which president/COO Brian Dunn described in a conference call as “the new hearth of the North American home” — and on installation, which he called “the centerpiece of [our] future.” CFO Darren Jackson added that the company would “aggressively grow our home theater capabilities, services and advertising” in the second half.