Best Buy Mobile Beating Expectations

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NEW YORK — Best Buy Mobile is on a tear.

Best Buy’s wireless operation, developed with and co-owned by European partner Carphone Warehouse (CPW) , had a “transformational year” in which cellphone activations rose more than 30 percent to 5.5 million for the 12 months, ended April 3, suggesting a 4 percent to 5 percent share of all U.S. handset sales for the period, CPW said.

What’s more, earnings before interest and taxes (EBIT) for Best Buy Mobile soared 475 percent to $71 million over the same 12-month period.

In a fourth-quarter earnings announcement last month that shed light on both the mobile unit and Best Buy’s new “connected world” strategy, CPW chairman Charles Dunstone noted, “Best Buy Mobile U.S. is outperforming even our expectations” thanks to strong sales and operational efficiencies.

The freestanding stores and wireless departments, which first appeared in 2006, are differentiated by their full carrier offering, a knowledgeable — and impartial — non-commissioned sales staff, and a simplified customer experience.

EBIT is expected to grow at a more moderate 15 percent to 20 percent pace during the current fiscal year as Best Buy Europe, the joint retail venture that runs Best Buy Mobile, continues to invest in online operations and standalone stores.

Indeed, Best Buy CEO Brian Dunn told The Financial Times last month that the partners may eventually open as many 1,000 freestanding Mobile stores across the U.S. in pursuit of their long-term goal of a 15 percent share of the domestic wireless market.

There are currently 1,147 Best Buy Mobile sites throughout the U.S., representing an 8 percent uptick during CPW’s Apri l-through-March fiscal year. The locations are comprised of 1,070 departments within all Best Buy flagship stores (up 4.6 percent year over year), and 77 stand-alone stores, which is nearly double the 2009 count.

In its own fourth-quarter earnings announcement, Best Buy said it planned to open between 75 and 100 small-format stores during its current fiscal year, comprised mostly of Mobile stores. Chief financial officer Jim Muehlbauer told analysts during a recent conference call that the 1,500-square-foot shops — located in high-traffic areas like shopping malls and focused on selling “margin- rich” connections for wireless devices — generate greater margin per square foot than Best Buy’s big-box locations.

The freestanding stores also attract a different customer base, notably women, so that “the vast majority” of Mobile sales are incremental and do not can- nibalize the company’s flagship stores, Dunn noted during the call.

A key profit driver for both the freestanding and in-store shops is the dramatic adoption rate of smartphones, which will represent about 83 percent of all cellphones by 2013, CPW projected. The average revenue generated by a smartphone activation is presently 3 percent higher than that of non-smartphones, the U.K.-based wireless retailer reported, while Geek Squad service attachments rates are 44 percent for smartphones vs. 35 percent for nonsmartphones, and attachment rates of accessories are 36 percent for smartphones, compared with 14 percent for less sophisticated handsets.

Some analysts believe the strong results generated by Best Buy Mobile, and the current glut of cheap retail space, should put to rest rumors that chief executives Dunn and Dunstone are planning to purchase RadioShack, which is similarly shifting to a mobility and connectivity- centric strategy.

Meanwhile, CPW provided a preview of what Best Buy stores, or at least the center of their sales floors, may look like in the coming months and years. CPW’s Wireless World chain, which includes 29 stores in the U.K. and seven in Spain, is the embodiment of the “connected world” strategy, espoused by both partners, in which CE hardware serves as the foundation for sales of accessories, subscriptions and services.

Elements of the Wireless World format will likely be incorporated into “connectivity centers” in the middle of Best Buy’s stores that will supplant slowturning entertainment software with bundled content solutions, including mobile and wireless broadband services and streaming content. Dunn acknowledged that various components are now being tested at Wireless World stores in the U.K., and that the centers will serve as a “stage” in which “hardware is really the starting point, not the end.”

For its part, CPW expressed confidence that its Wireless World format is working, as it “stretches the brand to incorporate all things connected” and prepares to open more than 64 new stores over the next 12 months.

Separately, Best Buy and CPW opened the first big-box Best Buy store in the U.K. last week. The 50,000- square-foot unit, located in East London, is the first of eight to 10 largeformat stores planned for the British Isles this year and 60 to 150 envisioned for the future.


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