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Best Buy’s Q2 Income Climbs

Best Buy reported last week an overall operating income of $242 million in its fiscal second quarter, compared with $229 million in the same three months last year.

However, operating income dropped to 4 percent of revenue in the second quarter, compared with a year-on-year 4.2 percent. The decline was attributed mainly to charges for asset impairments, transition costs and a preliminary settlement of pending litigation.

Second-quarter net earnings increased to $150 million, up from $139 million in the same quarter a year earlier.

Overall revenue increased 13 percent, as reported, to $6.1 billion, in the second three months, ended Aug. 28, up from $5.4 billion in the year-ago period. Comp-store sales rose 4.3 percent.

Gross profit margin reached 25.5 percent in the second quarter, a slight improvement over the 25.4 percent recorded in the same three months in 2003. The increase was driven by a more profitable revenue mix and a less promotional environment in the chain’s international division.

Expenses in the second quarter climbed to 21.6 percent from 21.2 percent, due to asset impairment charges, costs associated with outsourcing the information technology function, and pending settlement of litigation.

“Our ability to deliver double-digit EPS growth in a more modest comparable-store sales environment, while absorbing the charges in the quarter, emphasizes the improvements we have made to our operating model,” said Brad Anderson, vice chairman/CEO.

Best Buy’s customer loyalty program, Reward Zone, continued to contribute to the retailer’s revenue growth in the second quarter. However, Reward Zone reduced the gross profit rate by 0.8 percent of revenue, compared with 0.4 percent in the same three months the previous year.

Sparked by healthy sales of digital televisions and the opening of 75 new stores during the past 12 months, Best Buy pushed domestic store sales up 12 percent in its second quarter, as reported, hitting $5.5 billion, compared with a year-ago $4.9 billion (see TWICE, Sept. 6, p. 1).

Domestic comp-store sales climbed 4.4 percent in the three months at the retailer’s big-box units, and jumped 6.8 percent at its Magnolia Audio Video chain division. Expanded assortments and increased consumer interest boosted DTV sales in both the Best Buy and Magnolia chains — together up by the high double-digits, according to the retailer.

Second-quarter operating income for Best Buy’s domestic stores division increased to $239 million from $230 million. However, operating income decreased to 4.3 percent of revenue in domestic stores during the three months, down from 4.7 percent year-over-year.

Although domestic stores maintained a 25.6 percent gross profit margin during the second six months, expenses rose to 21.2 percent from 20.9 percent in the year-ago period.

The retailer said its 30-plus customer centricity laboratory stores continued to outperform other U.S. Best Buy locations, in terms of comp-store sales gain and gross profit rate. The lab stores, collectively, had a comp-store sales increase more than double that of other domestic locations. Gross profit rate collectively of lab units was about 0.5 percent of revenue higher than other U.S. stores.

“The beauty of our customer centricity work is how it enhances our operational excellence, our ability to turn talent into performance and our strength in building brands,” said Anderson.

For the six months, Best Buy overall revenue moved up about 15 percent to $11.6 billion from $10.1 billion the previous year, while net earnings more than doubled to $264 million from a year-earlier $114 million.