Best Buy Stresses Multichannel Strategy

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MINNEAPOLIS –

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

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 sellers.

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 percent.

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

BestBuy.com

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 platform.

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 season.

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 margins.”

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