Best Buy to Scale Back Full-Size Store Expansion, Will Grow Best Buy Mobile

Best Buy this year will continue scaling back expansion of its full-size U.S. stores as it adds 75 to 100 Best Buy Mobile locations, senior executives at the chain said Thursday on a quarterly earnings call.

The chain had been growing the number of full-size facilities at an 8 to 10 percent pace for several years. But in 2009, it slowed expansion to 3 percent when it added 46 Best Boy stores and 36 Best Buy Mobile outlets that it jointly developed with Carphone Warehouse. The Best Buy Mobile stores operate at higher gross margins than standard Best Buy stores due to a sharp focus on selling cellular and other services, the company said. Best Buy’s standard store gross margin per square foot hit $217 last year, up from $197 in 2007, said David Strasser, an analyst at Janney Montgomery Scott. “The Best Buy Mobile stores have smaller sales per square foot than larger locations, but the margin per square foot will be much higher,” Best Buy Chief Financial Officer Jim Muehlbauer said on the call.

Best Buy ended fiscal 2010 in February with 74 Best Buy Mobile stores, and 1,069 full-size stores ranging from 20,000 to 58,000 square feet, Strasser said. In addition to Best Buy Mobile, mixed into Best Buy’s smaller format stores are 20,000-square-foot, many of which will open this year, the company said. Best Buy had 79 20,000-square-foot stores as of Feb. 27 targeting smaller markets, and 405 30,000-square-foot locations, Strasser said. Best Buy has 515 45,000-square-foot stores, he said.

"When I look at where the business had options to grow in the past five years, really we were limited by what we initially saw in the domestic market by focusing on 45,000 and 30,000-square-foot boxes,” Muehlbauer said. Best Buy has “refined” its stores’ “operating model” so that all sizes deliver “very similar returns on invested capital over their life,” Muehlbauer said. Best Buy forecasts spending $850 million on capital projects in fiscal 2011, Muehlbauer said.

As it expands Best Buy Mobile, the chain also is moving to increase revenue from installation and services like cellular and Napster, it said. It’s also expected to introduce a video download service. Best Buy has spent nearly two years honing its sales of services and appears poised to expand it, analysts say. It has tested various aspects of selling “connectivity solutions” at locations in Minneapolis and Vancouver, B.C., in North America and in Wireless World in the U.K. Best Buy Europe, which includes Wireless World, is a joint venture with Carphone Warehouse.

"There are a lot of component parts that we're learning around the physical aspect of the store,” Shari Ballard, executive vice president of retail channel management, said on the call. “What kind of labor model do you want? And what kind of a selling model do we want to sell a connected world?” Best Buy also is reviewing the technology infrastructure needed to bring connected services “to life” for consumers and the chain’s employees, Ballard said.

While connected services are available in Best Buy stores, “they are invisible,” Executive Vice President Mike Vitelli said. “There’s no place to see them and what the center of the store is about is to put those literally and figuratively front and center for our customers to see the art of the possible” when TV, cellphones and PCs connect to the Internet, he said.

In international markets, Best Buy will open 10 to 15 Five Star stores in China, but will slow expansion there until “we believe we have a concept that serves both the needs of our customers and shareholders,” CEO Brian Dunn said. While the 158-store Five Star chain is profitable and posted “double digit” gains in operating profit, the non-commissioned sale strategy is ahead of Chinese consumers “by a few years,” Dunn said.

Best Buy’s Q4 net income improved to $779 million from $570 million a year earlier as revenue jumped to $16.5 billion from $14.7 billion on a seven percent gain in same-store sales. Overall gross margins fell to 24 percent from 24.6 percent due to Best Buy’s decision to “grow” some lower margin products like notebook PCs, Chief Financial Officer James Muehlbauer said.

Best Buy’s U.S. operating income grew to $1.1 billion from $883 million as sales rose to $12.5 billion from $11.2 billion as same-store sales increased 7.4 percent. Gross margin declined to 23.6 percent 24.6 percent due to strong sales of notebook PCs, which carry a lower gross profit, the company said. In CE, same-store sales rose 4.2 percent despite the category accounting for 39 percent of Q4 sales, down from 40 percent a year earlier. Home office increased to 33 percent of Q4 revenue from 30 percent a year ago as same-store sales jumped 21.7 percent. The entertainment software same-store sales decline narrowed to 4.9 percent from 11.9 percent last year as the category declined to 18 percent of Best Buy’s revenue from 21 percent. Appliances, which represented four percent of revenue, swung to a 6.5 percent same-store sales gain from a 20.5 percent decline.

The chain’s international division’s Q4 operating income rose to $187 million from $97 million as sales increased to $3.9 billion from $3.4 billion. It swung to a 5.5 percent same-store sales gain from a 5.3 percent decline. International CE same-store sales fell 3.1 percent and accounted for 23 percent of international revenue. In the home office category, same-store sales increased 5.9 percent and were 51 percent of international revenue. The appliance segment rebounded, swinging to a 46.1 percent same-store sales gain from a 9.7 percent decrease a year ago.

Best Buy’s online sales rose 20 percent in fiscal 2010 to $2 billion, helping the chain gain market share, company officials said. Best Buy picked up 2.1 percent in market share, ending fiscal 2010 with “mid-20s” percent share of the U.S. CE retail business, Chief Marketing Officer Barry Judge said. While Best Buy benefitted from Circuit City’s departure, the chain’s gains also came from “other channels and competitors,” including e-commerce, Judge said.