Best Buy's jaw-dropping promotions over the Thanksgiving weekend contributed to weaker-than-expected earnings for the third quarter, the company said.
However, CEO Brad Anderson defended the aggressive price moves, stating they helped Best Buy win market share, brand loyalty and new customers as the chain headed into the final and most earnings-rich quarter of its fiscal year.
"We underperformed on the bottom line, but we are not disappointed in our performance," he told analysts on a conference call. "The gross profit rate decline was larger than expected, but we made the right choice on margin. We chose to match or beat the competition on stake-in-the-ground categories including flat-panel TV, and I would do it again."
Anderson said the actions on Black Friday, which included a Toshiba notebook for $250 and an unprecedented $1,000 price point on Panasonic's 42W-inch step-up plasma HDTV, generated record traffic and significant gains in market share. "We were willing to make a small investment in gross profit rate to secure customers," he said. "We gained market share in flat-panel TVs and notebook computers and sold a lot of gift cards that will be redeemed at twice the face value."
The company's gross profit rate for the third quarter was 23.5 percent of revenue, down from 24.4 percent last year, and operating income for its U.S. operations fell 6 percent, to $186 million, for the three-month period, which included the first three days of the Thanksgiving holiday.
Company-wide revenue rose 16 percent, to $8.5 billion, and same-store sales grew 4.8 percent compared with a 3.3 percent gain last year. Domestically, net sales rose 11 percent, to $7.2 billion, and comp-store sales increased 3.6 percent, compared with a 3.3 percent gain last year.
Broken out by channel, same-store sales at U.S. Best Buy locations increased 3.7 percent during the quarter, while same-store sales at the 20-unit Magnolia Audio Video chain fell 10 percent on total revenue of $41 million, due to TV price compression and tough year-ago comparisons. Online sales rose over 30 percent for the period thanks to improvements in the company's Web sites and in-store pick-up process, while Pacific Sales, the recently acquired 14-store luxury white-goods chain, generated $77 million in net sales.
Total revenue was boosted by the addition of 41 new Best Buy locations, 131 Five Star white- and brown-goods stores in China, and the Pacific Sales chain. Comp-store sales were driven by a 13.7 percent increase in Canadian store comps, plus increases in average transaction size as the company's revenue mix continued to shift toward higher-ticket items.