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Best Buy’s Sales Up, Earnings Off

Minneapolis — New store openings and a comp-store sales gain of 3.7 percent combined to drive up U.S. Best Buy stores’ fiscal third quarter revenue by 9 percent, hitting $6.4 billion.

A continued shift to higher-ticket items — including flat-panel TVs, major appliances and notebook computers — led to an increase in average transaction size.

When third-quarter revenue for Best Buy’s Magnolia Audio Video stores is combined with the Best Buy locations, total domestic stores revenue climbed by another $46 million (excluding the results of Magnolia Home Theater stores, which are reported as part of U.S. Best Buy), and domestic comp-store sales came in at 3.8 percent, compared with 3 percent last year.

Total domestic revenue — Best Buy and Magnolia stores — reached $6.5 billion in the third quarter, up from a year-ago $5.9 billion. Operating income dropped to $198 million in the three months, down from $228 million in 2004. Gross profit as a percent of revenue rose to 24.8 percent in the third quarter, up from a year-earlier 23.4 percent. Expenses increased to 21.7 percent in the quarter, compared with 19.5 percent in the prior year.

Although Best Buy said it generally was pleased with its sales and comp results, earnings fell short of expectations with both consolidated operating and net results below the third quarter last year. The company succinctly said in an investor conference call that it’s blamed its earnings shortfall on “overspending its expenses” — primarily costs for its customer centricity program, opening seven stores in the Canadian province of Quebec, disappointing overall numbers in Canada, cost of its services business expansion and a somewhat promotional environment.

“We entered this quarter with very ambitious plans for organic growth and transformation activities,” said Brad Anderson, vice chairman/CEO. “We invested aggressively in a portfolio of initiatives. Specifically, we converted a record number of segmented stores, launched Best Buy Canada into Quebec and expanded our services business.

“Clearly, we are over invested in certain transformation activities. As a result, our SG&A spending was unacceptably high. We are evaluating our spending to increase the yield and will edit activities that aren’t delivering results,” Anderson said.

Due to strength in sales of audio and video products, high-end CE retail Magnolia Audio Video reported an 18.9 percent comp-store sales increase for the third quarter, ended Nov. 26. Best Buy said it was encouraged by the “enthusiastic” customer response to the Magnolia Home Theater store-within-a-store experience, “which takes advantage of the rapid growth in flat-panel televisions through a broader, high-end assortment.”

In the third quarter, Best Buy enjoyed “significant” comp-store sales gains in flat-panel TVs, MP3 players and accessories, and notebook computers. These gains more than offset comp-store sales declines in tube and projection TVs, video gaming and movies, said the retailer.

Best Buy’s revenue mix in the third quarter reflected continued growth in its CE products group, which represented 44 percent of third quarter revenue, up from 39 percent year-on-year. The CE products group recorded a 14 percent comp-store sales gain, compared with a year-ago 5.8 percent.

Within the CE group, flat-panel TVs posted a triple-digit comp-store sales gain, as unit-volume growth and increased screen size more than offset the impact of average selling price declines. Total television comp-store sales grew in the high teens as flat-panel TV growth was partially offset by declines in CRT and projection units. MP3 products generated triple-digit comp-store sales gains as customers responded to an increased assortment of players and accessories, said Best Buy.

The major appliances product group, which represented 6 percent of third quarter revenue — the same as last year — reported a comp-store sales gain of 7.3 percent in the third quarter, down from 8.4 percent in the year-ago three months. This product group benefited from an expanded assortment, increased labor on the selling floor and increased sales of higher-ticket items such as custom orders.

The home office product category saw its share of third quarter revenue drop from 34 percent in the third quarter in 2004, to 33 percent this year. The group registered slightly negative comp-store results in the current third quarter, compared with a 1.5 percent rise last year. A low double-digit comp-store sales increase for notebook computers was more than offset by com-store sales declined from desktop computers, printers and phones. Best Buy said this group also benefited from comp-store sales gains in Geek Squad services and cellular phones.

Entertainment software, which accounted for 17 percent of third-quarter revenue, down from the prior year’s 21 percent, saw comp-store sales drop to a negative 12.2 percent from nearly a 1 percent gain last year. The chain noted strong consumer response to the launch of the Xbox 360 console at the end of the third quarter, offset by sales softness in older platforms leading up to the product launch, resulting in a gaming comp-store sales decline in the low double digits. New movie and music releases also registered third quarter low double digit comp-store sales slides.

Consolidated third quarter Best Buy revenue increased 10 percent to $7.3 billion, from $6.6 billion in the same three months last year. Comp-store sales were 3.3 percent, compared with 3.2 percent in 2004.

Margin gains in the third quarter rose to 24.4 percent from a year-earlier 23.2 percent, as Best Buy lauded its continued growth of its Geek Squad, as well as a more favorable sales mix and continued contributions from the retailer’s private-label products line-up and strategic pricing initiatives.

However, the expense rate in the third quarter climbed to 21.8 percent, from 19.7 percent in the same quarter in 2004, driven by higher store operating costs, including more locations operating under Best Buy’s customer centric labor model, as well as costs associated with the retailer’s services business.

To that end, consolidated third-quarter operating income slipped to $189 million from a year-ago $233 million, and net income in the same time frame decreased from $148 million in 2004, to $138 million in this year’s three months.

For the nine months, U.S. Best Buy stores recorded a 4 percent comp-store increase, down from a year-on-year 5.2 percent. Domestic store comps, including Magnolia, reported the same numbers. Total chain comps for the nine months slipped to 3.7 percent, down from a year-earlier 5.1 percent.

Consolidated Best Buy revenue for the nine months moved up to $20.2 million, from $18.2 million last year. Operating income came in at $689 million for the nine months, compared with a year-ago $659 million, while net income for the period registered at $496 million, up from $412 million in the same nine months in 2004.