Best Buy Co., Inc. (BBY)
Q3 2009 Earnings Call Transcript
December 16, 2008 10:00 a.m. ET

Executives

Jennifer Driscoll - Vice President, Investor Relations
Bradbury H. Anderson - Vice Chairman of the Board, Chief Executive Officer
James L. Muehlbauer - Senior Vice President and Interim Chief Financial Officer
Mike Vitelli - Executive Vice President, Customer Operating Groups
Barry Judge - Senior Vice President, Consumer and Brand Marketing
Brian J. Dunn - President, Chief Operating Officer
Shari L. Ballard - Executive Vice President, Retail Channel Management
Robert A. Willett - Chief Executive Officer Best Buy International
Sean Skelley – Senior Vice President and Business Group Leader
Andrew Lacko - Investor Relations

Analysts

Gregory Melich - Morgan Stanley
Colin McGranahan - Sanford Bernstein
Matthew Fassler - Goldman Sachs
Brian Nagel - UBS
Jack Murphy - William Blair
Scott Ciccarelli - RBC Capital Markets
Chris Horvers - J.P. Morgan
Kate McShane - Citigroup
Mitchell Kaiser - Piper Jaffray
Anthony Chukumba - FTN Midwest Securities

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Best Buy''s conference call for the third quarter of fiscal 2009. (Operator Instructions) At this time all participants are in a listen-only mode. Later we’ll conduct a question-answer session. At that time if you have a question you’ll need to press “*1” on your touchtone phone, if you choose to be taken out of the question queue please press “*2”. As a reminder this call is being recorded for playback and will be available 12 o clock Eastern Time today. If you need assistance during the call at any time please press “*0” and an operator will assist you. I would now like to turn the call over to Jennifer Driscoll, Vice President of Investor Relations. Please go ahead.

Jennifer Driscoll – Vice President Investor Relations

Thank you and good morning, everyone. Thank you for participating in our third quarter conference call. We have two speakers for you today. First, Brad Anderson, our Vice Chairman and CEO, will give an update on how Best Buy is responding to the challenging consumer environment and preparing for the future. Second, Jim Muehlbauer, our Executive Vice President of Finance and CFO, will recap our third quarter performance and add color on our earnings guidance. We will leave more than half of the time on our call for questions and answers. As usual, we have a broad management group here with me today to answer your questions following our formal remarks. We would like to request that callers limit themselves to a single question so we can include more people in our Q&A session. Consistent with our approach on prior calls, we will move to the end of the queue those who asked a question on last quarter’s conference call.

We’d like to remind you that comments made by me or by others representing Best Buy may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management’s expectations. May we also remind you that as usual, the media are participating in this call in a listen-only mode, and with that, let’s turn the call over to Brad Anderson, who will begin our prepared remarks.

Bradbury H. Anderson – Chief Executive Officer

Thank you, Jennifer and thanks to all of our listeners for participating in our third quarter call. When we updated our earnings guidance in November, we said that rapid changes in consumer behavior had created the most difficult economic climate we had ever seen. The results we are reporting this morning, and even weaker results that we have seen from others in our industry for the same period, show that our statements were accurate. In addition, we believe that the environment for consumer spending is likely to get worse before it gets better. While lower energy costs are an offset, we anticipate that company’s will be laying off more employees, which will exacerbate the decline in consumer confidence, uncertainty, and weakening demand. In fact, we can foresee a period in which consumers may significantly shift their spending behaviors, which could have a dramatic impact on retailing. To be completely clear, we think it’s fair to let both the investment community and our people know that we are preparing for a wide range of outcomes for the next year, including potentially significant comparable store sales declines.

Part of the reason I enjoy history is because it gives the readers a chance to look at the choices other leaders have made in similar circumstances and the outcomes of those choices. While there’s never a perfect parallel to a single moment in history but if we choose to look at other very difficult macroeconomic challenges in periods like the 1930s in the U.S., as well as globally, and in the 1970s, primarily in England, I believe you can see three patterns emerge in companies that are winners over the long haul in very challenging times. The first is they survive. Now that sounds obvious but in difficult times, many enterprises do not. In order to survive, those companies recognize the new reality and more rapidly than some of their competitors, they adjusted to it. Second, they focus on their core customers and enhance the value they provide to them. In order to accomplish this, their organizations had to emerge with greater capabilities, even as they spent less resources. Third, when growth reemerged, these companies saw significant financial returns and their skills were even more in demand than they had been, and they realized that they were more unique and that they would have been without the financial crisis.

That may sound like common sense and it probably is but the good news is that we at Best Buy believe we are capable of doing what these winners of history did, and we’ve already started preparing the company to do exactly what they did applying the three lessons. First, lesson one. We got a lot of reaction in November to our use of the word seismic in describing the significance of the change we were facing. That phrase picked up a lot of attention and we think more people now agree with us that it’s an accurate depiction of the economic climate. Top of mind for us is ensuring that we remain in a strong financial position no matter what the future brings. So we are peeling back on the level of our investment in the business. We’ve already taken actions to cut our spending, as we reported in this morning’s news release, and after the second quarter, we made reductions in discretionary spending in labor and other areas where we expected reduced volumes.

Since that time, we’ve made further cuts in inventory orders and in discretionary projects. And yesterday we announced a voluntary separation program. We offered nearly all of our corporate employees a voluntary separation program because we’ve always believed employees are our most valuable asset and we wanted to reduce the number of involuntary separations. What we offered was an enriched severance package for those who chose to take this option, including more weeks of pay than we would typically offer in an involuntary program, plus the continuation of the employer’s subsidy of healthcare and dental coverage for a period of time, among other benefits. We told them that an involuntary severance package could be our next action to supplement the voluntary program. We will take further actions as well. For example, we plan to cut our capital spending next year by approximately 50%, compared with the projected $1.2 billion in capital expenditures this year. One of the largest components of the reduction will be a significant reduction in the number of new store openings planned, both domestically and internationally.

Notice we are not dropping out our capital expenditures down to a maintenance level per the third lesson we talked about earlier, which is, which I will get to in a moment. We said on last quarter’s call that we also intend to take out significant levels of legacy costs in our business next year in order to improve our focus and provide further flexibility. Work is already underway on that front and SG&A dollar spending, including Europe, is targeted to grow by no more than 2% next year. That’s due to fewer stores, the removal of legacy costs and other actions, such as the voluntary and involuntary separation program. I should add that some of the actions we are considering will likely require restructuring costs later in fiscal 2009 and potentially in fiscal 2010 as well. We intend to update you on those after the final decisions have been made.

Lesson two, as we work to adjust to the realities of today’s changes, we must retain our core strengths and we believe for Best Buy, our core strength is and has been our culture. Our employees will be watching how we make these tough choices and our approach to those choices will place our values on center stage for them. We must proceed in this process, the best we can, without hurting their loyalty or their commitment to the company. We hope to do that by remaining true to our successful strategy to customer centricity and employee centricity, and that means inviting our employees to participate in determining where we pare back and where we plant seeds for the future, based on what they know about our customers. That means making offers like the voluntary separation program we just announced.

Lesson three, and most importantly, we plan to stay focused on the changing needs of our customers so that we can meet their current and future expectations. We fully expect that opportunities will emerge that would not have emerged in any other time. Consumer electronics offers tremendous engines of productivities and cost savings and we believe that our primary products and services will be even more important in people’s lives in the future than they are today. We must prepare to seize the day as those opportunities emerge and these unfolding opportunities could propel our company to new heights. If all we do is hunker down and we don’t plant seeds for the future, we won’t get the expected extraordinary outcome on the other side of this cycle and I believe that our future horizon will be much bigger than they are today in retail, in services, in dot.com, and in private label, to give just a few examples. If history is a guide, there may be disproportionate winnings for those who are with us at that time.

To conclude, we face the most challenging consumer environment in history. We are reducing our spending. We are cutting our costs, and we are being conservative to maintain flexibility and retain our financial strength. In addition, we will use our employee’s insights to provide greater value for our best customers and continue to grow our market share through all of our touch points. And lastly, we will plant seeds for the future that will allow us to grow when the global economy recovers, using the unique skills we’ll be developing over the next two years.