Best Buy, Circuit City and Tandy finally went head-to-head in New York. No, Best Buy and Circuit City didn’t surprise everyone and open stores in the tri-state area the same week as Tandy’s Incredible Universe debut.
The event was Robertson, Stephens & Company’s annual Consumer Conference held September 13-15 at New York’s Pierre Hotel — where investment analysts were given a unique opportunity to measure the performance, strategies and styles of these three retailers, plus regional players Rex Stores and Ultimate Electronics.
All five retailers outlined present and future plans, and their views of the marketplace. (For Tandy’s report, see page 6.) Best Buy and Circuit City made their presentations on the same days they issued their second-quarter results. Here is a summary of their remarks:
Circuit City: Richard Sharp’s presentation was quite significant, if only for the fact that the chairman rarely, if ever, speaks to a group that includes the press. Sharp wants the chain to have “$15 billion in sales in our core businesses by the year 2000.”
Circuit City’s net earnings for the second quarter ended August 31 were $41.2 million, a 14% increase over the same quarter last year. Total sales grew 31% to $1.6 billion over last year’s second quarter.
During the first half net earnings were $65.9 million, an 18% increase. Total sales during the half were up 32% to $2.99 billion. Comparable-store sales were up 10% for both the second quarter and the first half.
Sharp cited Circuit City’s number-one ranking on TWICE’s Consumer Electronics Retail Registry (covering 1994 sales), making the point that his chain is “the only specialty retailer in the top 10 with a full-service offering.”
In an era when many retailers are going to a non-commissioned sales format, Circuit City’s commissioned sales force is one the chain’s strengths. Sharp stressed that “adequate sales help to explain product benefits and build volume.”
In other formats, he noted, customers enter stores and often select lower priced products because “they don’t know what the product benefits are.” Circuit City’s format provides “better merchandise and good gross margins versus the competition,” Sharp said.
The chairman described Circuit City’s pricing strategy as being “tactically aggressive. Overall lower prices offer no competitive advantages to anyone. Lower margins result. We will be price competitive but will not structurally lower prices.” And although Circuit City will “match the competition on pricing” selectively, the chain won’t be “foolish” in its strategy.
For Circuit City’s store sizes, there are now four selections: 15,875 square feet; 23,293 square feet; 33,814 square feet; and 46,698 square feet. Sharp said that store size selection depends on the size of each geographic market served and the potential amount of sales to be generated.
During the second quarter Circuit City opened 15 superstores and replaced two existing units with larger locations.
In discussing product categories, Sharp cited three growth areas: home theater, personal computers, and digital video/DSS. In home theater Circuit City now has “five to seven home theater displays in each store featuring big-screen TVs. That is a growing part of our mix.”
Sharp describes personal computers as “currently our fastest growing [category]. It should expand more than any other.” When asked if personal computer demand, and the Windows 95 phenomenon, has taken dollars away from traditional audio/video categories, he noted that “big-screen sales have been good, but overall audio/video has not been as strong this year. It is logical to assume that some disposable income has gone to PCs.”
In the “digital/DSS” category, Sharp claims that Circuit City is “the nation’s largest DSS retailer.”
He also predicted that digital video disc will be available by late 1996 or early ’97. And days before a truce was signed between DVD’s warring factions, Sharp noted, “We need one standard before going to market. It won’t take off unless that happens.”
Best Buy: Describing his chain’s format as one that “looks like a discount store and appeals to female customers,” chairman Dick Schulze outlined his goals for the year. They include: further expansion in new and existing markets; broadening Best Buy’s product assortments in exclusive deals with Cambridge, Polk Audio and others; adding compatible product lines; and optimizing profits per square foot.
Schulze announced that Best Buy is entering the office supplies business this month, with 2,000 SKUs. “We are offering two-thirds of the selection found in an Office Depot or Office Max in one-third of the space,” he said. The category should provide “high margins and increased traffic, as well as improved customer service.”
The chairman claimed that Best Buy is the top retailer of PCs in the country, with computers being 35% to 37% of its total sales mix. Schulze also said that during the last year Best Buy became the top retailer of Pentium-based PCs in the U.S.
With Best Buy’s strong position in PCs, he explained, pricing was critical. Competition has been heavy this year, especially during the first half. Best Buy will use higher-margin service items to help PC profitability.
On the same day as Schulze’s presentation, Best Buy issued its second-quarter and first-half results for the period ending August 26. Earnings for the second quarter were $5.71 million, down from $7.6 million in the same quarter last year.
In the first half earnings were $10.3 million, down from last year’s $11.8 million. Gross profit margins were 13.7% in the second quarter and 14% for the half, compared to 14.2% and 14.1%, respectively, for the same periods last year.
Revenues for the second quarter were $1.4 billion, versus the previous year’s $933 million, a 54% increase. For the first half revenues were up 52% to $2.71 billion. Comparable-store sales were up 7% for both the quarter and the half.
Schulze said comp-store sales would continue to increase in “high single digits” on a much larger sales base than last year — a performance that is in line with the company’s expectations at the beginning of the year.
In discussing expansion, he noted that Best Buy covers 40% of the U.S. population, with 226 stores in 27 states. As for its fiscal third quarter, Best Buy is set to open 27 new stores, which will include 10 more stores in Los Angeles, four in the Baltimore/Washington, D.C. market, and an entry into the Cincinnati area with three stores.
When asked if the chain was contemplating a move into Northern California, Schulze said, “We have one store in development there and training personnel to run it. We currently have a distribution center in Ontario, Calif., but we are planning a new distribution center that could serve the entire state and which will open during fiscal 1997.”
Rex Stores: Stuart Rose, chairman of the Dayton, Ohio-based chain, emphasized the company’s entrepreneurial nature during his presentation. “We make more money in small- and medium-size markets than [major chains],” he claimed. “We are the largest CE retailer for small- and medium-size markets.”
The company operates 168 stores in 25 states, primarily in the Midwest and the Southeast. Days after its presentation, Rex said it would open 35 to 40 new stores during fiscal 1997, which ends January 31, 1997, up from the 30 to 35 it had planned to open.
Rose said that Rex is focusing on those markets that are underserved by the competition, and that 400 new markets meet that criteria.
“During fiscal 1995 our sales increased 28.4%, net margins are up 3.3%, net income rose 45.9%, and comparable-store sales have increased 6%,” he said. Since 1992, when it had 98 stores in operation, compound annual sales have grown from $201.8 million to $382.8 million with 165 stores.
Another strength of Rex is its “depth of product selection,” Rose said. “We are a recognized leader in TVs, VCRs, camcorders and audio. We carry leading brands. We also carry major appliances in 90% of our stores and are now marketing computers in 90 stores.”
Ultimate Electronics: The Denver-based chain is counting on plenty of growth, and the retailer will not have to leave home to find it. “We think there’s almost unlimited growth potential in the Rocky Mountain states, within a 1,200-mile radius of Denver,” stated Bill Pearse, chairman of the 16-store chain.
The company plans to open its 17th store in late September in Boise, Idaho. A 50,000-square-foot store, Ultimate’s largest, is scheduled to open in Tulsa, Okla. in November.
Pearse’s list of hot categories now, and for the near future, is a familiar one: home theater, computers and DSS. “Consumers are just now beginning to understand home theater,” he said, “and we’ve seen the tip of the iceberg with DSS. This is just a preview of what’s going to happen.”
The company is driving growth by focusing on middle- and upper-end consumers, a strategy that has allowed it to compete successfully against the larger format retailers. Ultimate reported in August that its comparable-store sales increased 7% for the fiscal year that ended July 31.