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Best Buy Stresses Multichannel Strategy


Best Buy reported a 30.3 percent
decline in profits, but will continue its multichannel

That was the message from the No. 1 CE chain
when last week it reported its second-quarter profits
slipped to $177 million, amid stagnant sales and hefty
spending on advertising and promotions.

Best Buy also lowered its full-year earnings outlook
and is projecting comp-store sales in the range of flat
to negative 3 percent for the current fiscal year, based
on consumer spending and CE industry trends.

But despite the downturn, which management attributed
to the weak economy and soft CE demand,
CEO Brian Dunn reaffirmed his faith in Best Buy’s multichannel
strategy, and said the company would continue
to leverage its financial strength and scale to fuel
initiatives and drive growth.

Net sales were flat at $11.3 billion for the three
months, ended Aug. 27, while U.S. sales slipped 1.5
percent to $8.3 billion and U.S. comp-store sales declined
2.7 percent.

In contrast, online revenue rose 13 percent as the
company expanded its web-only assortment and prepared
to introduce new traffic-driving features such as
“Deal of the Day” sales and a “Marketplace” for thirdparty

Broken out by category, e-readers saw a triple-digit
increase in comp sales, majap comps spiked 12 percent,
mobile computing comps (including tablets) increased
12 percent, and subscription services rose 4

However, the gains were offset by a low double-digit
decrease in TV comps and declines in gaming, digital
imaging and physical media.

In addition, comp sales of mobile phones fell 5 percent
during the quarter, reflecting tough year-ago comparisons
due to price declines and a dearth of trafficdriving
introductions, such as last year’s iPhone 4 and
HTC’s Evo launches.

Nevertheless, Dunn said during a conference call
that the company increased its share in mobile during
the quarter as subscription volume grew, and that
renewed sales growth is expected with the release of
new “iconic” smartphones this fall.

Similarly, while Dunn acknowledged that the TV
business remains “challenged,” Best Buy’s mix of
products with screen sizes of 46 inches and larger stands at 60 percent, with those models seeing double-
digit unit growth.

Meanwhile, domestic gross profit declined 3 percent
to $2.1 billion due to lower sales, continued
promotions within select categories, and higher
sales of services that include deferred revenue, the
company said.

Total operating income declined 30 percent to $287
million due to the decline in gross profit dollars and
higher costs related to the net addition of 113 Best
Buy Mobile stand-alone stores and 14 big-box locations,
plus increased advertising.

Dunn said Best Buy “made good progress on our
key strategic focus areas,” which include multichannel,
mobile and big-box reduction. He affirmed the former
by noting that

currently gets 800 million
visits annually and is on track to double its domestic
sales within three to five years. In addition to the Deal
of the Day and Marketplace initiatives, the company
added 20,000 new SKUs to the site during its current
fiscal year, while in-store pick-ups increased more
than 100 basis points during the quarter to account for
over 40 percent of domestic online sales volume, he
said, underscoring the importance of a multichannel

In mobile, Dunn said the company added 25 standalone
Best Buy Mobile stores during the quarter, for a
total of 222, and described mobile phones and tablets
as “the two hottest consumer electronics products.”
He reported strong sales of iPad and solid, betterthan-
expected sales of Android devices, and said new
models in the pipeline, plus the stores’ Blue Shirtmanned
Tablet Central departments, have “positioned
us well to capitalize on the momentum this new product
category is bringing the industry.”

Chief financial officer Jim Muehlbauer reiterated plans
to reduce big-box square footage by 10 percent over
the next three to five years, as 40 percent of the chain’s
leases are set to expire within the next five. This year, the
company expects to cut square footage in more than 15
locations by subleasing space, and test stores with reduced
space and lower operating costs have not shown
materially lowered sales volumes, he said.

Dunn added that the company is “well positioned to bring the benefits of our multichannel model to our
customers and shareholders” during the coming holiday

In a research note, Credit Suisse retail analyst Gary
Balter described the Q2 results as “relatively strong”
given the macro environment and dearth of new products.
But he warned that management remains overly
brick-and-mortar-centric, and urged the company to
more quickly reduce its real estate and to use its $2
billion war chest to improve its website, without giving
away the store.

“We believe that Best Buy has to change its orientation
as the next, arguably current, battle will be fought
online,” he observed. “Done right, Best Buy can use
its retail stores as a great cash-flow machine to expand
online. but it has to be able to do it while maintaining