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Best Buy’s Dunn Says Growth Plan On Track


Shrugging off expected firstquarter
profit and comp-sale declines, Best Buy CEO
Brian Dunn is pointing instead to market share gains in
critical categories as validation of the company’s strategic

Key barometers for the three months, ended May 28,
included double-digit growth in e-commerce, tripledigit
increases e-reader sales, and a 28 percent surge
in wireless revenue, which helped generate more than
a billion dollars in operating cash flow, he told analysts
last week during an earnings call.

Investors apparently agreed, sending Best Buy
shares up more than 4 percent that day. Wall Street
was also enthused by the company’s $505 million
in stock buybacks and a full-year revenue projection
that’s leaning toward $52.5 billion, and forgave the 12
percent decline in first-quarter profits that was partly
due to targeted price promotions in pursuit of share.

“Best Buy’s Q1 was slightly ahead of expectations
… and should bode well as comparisons start to ease
from here,” Credit Suisse retail analyst Gary Balter observed
in a research note. “Q1 results showed better
sales than Q4, good expense management, and a very
strong balance sheet.”

To keep the momentum going, the retailer will press
on with a full spate of online, in-store and merchandising
initiatives that were first detailed in April (see
TWICE, April 18, p. 4) and which are beginning to
bear fruit, Dunn said.

In e-commerce, a critical battlefield where its most worrisome
competitor plays, the company is still
determined to double its business within the next three
to five years. To that end, it has added more than 10,000
SKUs to since the first quarter of 2010 and,
according to co-Americas president Shari Ballard, invested
in price promotions around computing, digital imaging
and portable electronics during the first quarter that succeeded
in goosing sales and growing share.

“You will continue to see us do that,” she told analysts.
We have not obviously closed all the competitive gaps
that we want to close, but we’re making good progress.”

In wireless, perhaps the most hotly contested category,
Dunn said Best Buy “significantly” increased its smartphone
share during the quarter, aided by a Lady Gaga
CD promotion; opened 20 new stand-alone Mobile stores
for a total of close to 200; and has expanded the size of
its big-box mobile departments in 600 locations to date.

Best Buy also performed 4 million “upgrade checks”
of customers’ wireless subscriptions during the quarter
— compared with 9 million during all of last year which
provides new sales opportunities, and is positioning itself
through marketing as “the home of 4G.”

The company is also taking an aggressive stance in
tablet computers by creating a Tablet Central zone within
its computing department. The zone, which was launched
last month and will reach all stores by July, is based on the
Best Buy Mobile model of a one-stop shop that offers a
wide selection of models, accessories and subscription
services. Tablets are also being sold within the standalone
Mobile stores, which draw a higher percentage of
female shoppers and first-time customers.

“We’ve been able to sell virtually everything that we’re
getting as this category continues to generate excitement,”
noted co-Americas president Mike Vitelli.

Also merchandised within Tablet Central are e-readers,
a relatively small category in overall dollars, but whose
growth was strong enough to meaningfully benefit Best
Buy’s overall domestic comp sales, said chief financial officer
James Muehlbauer.

He also pointed to highly profitable subscription services
as an important proxy for the company’s “connected
world” strategy. Best Buy is on track to reach its currentyear
goal of 10 million connections, up from 8 million last
year, as growth in postpaid mobile phone, mobile computing
and TV content subscriptions drove a 20 percent
increase in first quarter connections.

In gaming, the chain is rolling out a dedicated trade-in
desk for pre-owned games with an adjacent pre-order touch
screen. Game exchanges and sales of pre-owned titles have
improved by a ratio of 2:1 at stores with desks, Dunn said, and
customers are spending about half the value of the gift cards
they receive for their trade-ins in other sections of the stores.

Gaming, along with mobile computing, was also largely
responsible for the quarter’s sequentially better comps,
Muehlbauer said.

Still, not all cylinders were firing during quarter. Despite
increased demand for larger screen sizes, TV comps were
down by the high-single digits and the company has only
“modest expectations” for the category this year, Vitelli
said. Also, both Best Buy and the industry were impacted
by digital camera component shortages due to the recent
events in Japan, leading to a sales shortfall in that category,
although product availability is expected to improve
in the back half of 2011.

On the store front, the company has made “good initial
progress” towards its goal of reducing its big-box square
footage by 10 percent over the next three to five years, Muehlbauer said. To date, Best Buy has subleased
space in less than 50 stores, and will also
have an opportunity to reevaluate a large number
of locations over the next three to four years as
lease renewals come up.

Inside the stores, Ballard said Best Buy is
improving its product and sales training for associates;
removed certain non-customer-facing
positions to pay for the new gaming department
staff; and is seeing good initial results
from a new compensation model, in place in 30
Connected-format pilot stores, that’s based on
product knowledge, customer ratings and productivity.

Looking ahead, Best Buy believes the environment
will continue to be difficult for consumers
and competitive for the industry, and plans
to keep up its targeted multichannel promotions
in categories “where the customer goes,” Muehlbauer

Added Dunn: “Our ability to create compelling
offers that cause customers to respond
shows that our operating model has elasticity
and that we are truly selling products and services
at values consumers can’t pass up.”