This is a summary of the second quarter fiscal 2009 earnings call conducted by Best Buy Co., Inc. (BBY) on September 16, 2008.
Management:
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VP of Investor Relations: Jennifer Driscoll
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President, COO: Brian J. Dunn
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Executive VP Finance, CFO: James L. Muehlbauer
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Executive VP, Customer Operating Groups: Michael A. Vitelli
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Executive VP, Human Capital: John E. Pershing
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CEO: Bradbury H. Anderson
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Executive VP, Retail Channel Management: Shari L. Ballard
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CEO Best Buy International, Chief Information Officer: Robert A. Willett
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Senior VP and CFO Best Buy International: John Noble
Key Investor Issues:
- The retailer earned $202 million, or 48 cents a share, compared to $250 million, or 55 cents a share a year ago.
- Best Buy’s revenue jumped 12% to $9.8 billion thanks to sales of flat-panel TVs, laptops and cell phones. Same-store sales climbed 4.2%.
- The company’s online business continued to grow and its domestic online revenue rose by 32%.
- The company expects a same-store sales gain for 2009 in the upper half of its previously disclosed range of 1% to 3%.
Second Quarter Highlights:
The internal measures of customer satisfaction rose to a new high, over 81%. Likewise, market share gains accelerated on top of what were already all-time highs. Best Buy added share in TVs, computing, mobile phones, and gaming – in fact, all of the major categories in the past 90 days. Specifically, the company estimates that its domestic market share at the end of the calendar quarter was nearly 21%, up 1.6 percentage points versus the prior year’s period.
Employee retention is at an all-time high.
Best Buy never had turnover below 50% before and the 12-month rolling rate for turnover sits today at 49%.
The 4.2% comparable store gain, 5.3% in the US, was at the high end of most retailers in the past quarter.
The strategic investments in growth are beginning to have a noticeable and positive impact on the business. This impact was most apparent in the Best Buy Mobile experience, which the company accelerated to all US stores months ahead of schedule.
The company was generally pleased with its gross profit rate. At the same time, Best Buy sees an opportunity to improve the effectiveness of its promotions a bit when viewed collectively through the eyes of the consumer. Best Buy will not stop using promotions as a powerful means to deepen its relationship with its customers.
Revenue for the second quarter met the expectations.
The comparable store sales results for the domestic segment again showed strong improvement from the previous quarter, advancing 5.3%. These results were driven by continued strength in notebook computers and gaming, strong results in flat-panel televisions, and acceleration in Best Buy Mobile. The quarterly comparable store sales gains at stores open for six to 10 years were positive. On average, their comps were 3 to 4 percentage points better than expected based on the normal store maturation curve.
Normally comparable store sales peak after six or seven years and can go negative after that, unless the company remodels or relocates the store. The performance of these older stores in the last two quarters has stood out.
The international comps were slightly weaker than planned.
Canada had comparable store sales gain of 1% against a gain of 16% in last year’s second quarter. China’s second quarter, which includes results from April through June, have a 7% comparable store sales decline reflecting general economic conditions, including the aftermath of the earthquake.
The top line held up well considering the macro-environment. The drivers of these results were the US stores strong execution, their efforts to grow their business through a local lens, the improved product assortments, as well as benefits from the fiscal stimulus cheques.
Gross profit rate declined by 10 basis points, which was almost identical to what the company experienced for the first quarter.
The growth in notebooks and gaming has been applying pressure on the gross profit rate for two years and these categories continue to have growth rates well above the chain’s average.
As planned, the growth in Best Buy Mobile experience accelerated this quarter and the strength in the mobility area was nearly able to offset that mix impact from notebooks and gaming. This trend is expected to continue into the second half.
The original SG&A guidance includes deleverage for the fiscal year of 30 to 40 basis points to fund initiatives that would drive the long-term growth. Embedded in that assumption was an expectation that the second quarter would be the high-water mark for the deleverage in the year, or approximately 70 basis points.
The company also spent more than expected on travel and related activities, and incurred some one-time expenses that were not planned.
These expenses collectively cost the additional 20 to 30 basis points of deleverage that Best Buywe hadn’t originally expected.
The second quarter also included $0.02 of dilution in net interest expense resulting from the financing of Best Buy Europe without the benefit of any of its earnings.
At the outset of the year the company laid out expectations for a comparable store sales gain for Best Buy of 1% to 3% for the fiscal year.
