Best Buy’s Earnings Fall Short of Forecasts as Inventory Builds

Best Buy’s Q1 earnings fell well short of analyst forecasts partly due to a low single-digit decline in TV sales and a 15 percent rise in inventory. Best Buy posted Q1 earnings of 37 cents, short of analyst projections for 50 cents as same-store sales rose 2.8 percent against a forecast for a 4.5 percent gain.

Best Buy suffered a shortage of its top-selling 32-37-inch LCD TVs and tough comparisons with year ago results that benefitted from set sales fueled by the digital TV transition in the U.S, Best Buy Executive Vice President Mike Vitelli told analysts in a conference call. While Best Buy has invested heavily in stocking its stores with 3D, LED backlit and Internet-capable TVs, the categories haven’t become mainstream yet, industry officials said.

To expand sales of next-generation TVs, Best Buy is increasing space in its stores dedicated to Internet-capable sets as well as mobile and home broadband products, Best Buy officials said. At the same time, Best Buy is slashing space dedicated to entertainment software, same-store sales of which fell 12.8 percent in Q1. Best Buy also is bolstering its assortment of e-books beyond the Sony products it has carried for the past year. “These will be additional tools to show what’s possible in the connected world,” CEO Brian Dunn said.

Best Buy also will add sales of used videogames chainwide by late summer, building on a category that it has been testing for five years, Best Buy officials said. It recently shut down a 20-store test in Dallas of kiosk-based videogames trade-ins and rental after the kiosk provider filed for bankruptcy (CED May 3 p5). Under the new program, customers will trade in videogames in exchange for Best Buy gift cards, Vitelli said. Best Buy will take advantage of Sony’s plans for a firmware upgrade of PS3 consoles to add 3D capability and Microsoft’s shipments of a Kinect motion control system for Xbox 360 (CED June 15 p1), CEO Brian Dunn said. “We're on the front end of a new generation of videogames,” he said. The addition of used games brings Best Buy into competition with GameStop, which dominates the category.

"What Best Buy is hoping for is a traffic driver” in adding used games, an analyst said. “That’s their biggest issue right now.” Best Buy Q1 store traffic was “choppy and “lower spending” and driven by “important sales events,” Dunn said.

Best Buy’s sharp rise in inventory came as the chain boosted its assortment of notebook PCs, company officials said. But Best Buy is confident it can “work through” a lot of it “within a short period of time,” Chief Financial Officer James Muehlbauer said. Much of the inventory is PC-related and Best Buy took in an order of Apple iPads in late Q1 that increased it, analysts said. HTC’s Evo 4G cellphone and Apple’s iPad were strong sellers in Q1 and Best Buy’s readying for the arrival Apple’s next-generation iPhone on June 24, company officials said. With the arrival of new mobile products in Q1, Best Buy’s selling, general and administrative expenses rose to $2.48 billion from $2.2 billion as it revamped its home theater section and launched a new cellphone-related web site.

Best Buy’s Q1 profit rose to $155 million from $153 million a year earlier as revenue rose to $10.78 billion from $10.09 billion, the company said. Same-store sales rose 2.8 percent, inching up 1.9 percent and 6.3 percent in the U.S. and International markets, the company said. Best Buy-owned Five Star posted a 30 percent gain in same-store sales, while those in Europe were up five percent. In Canada, same-store sales declined two percent. Despite the increase expenses, Best Buy gross profit margin rose to 25.9 percent from 25.3 percent a year earlier. Best Buy U.S.’s Q1 operating profit declined to $298 million from $303 million as sales increased to $7.92 billion from $7.52 billion. The international division swung to a $15 million operating profit from a $7 million loss a year ago as sales jumped to $2.86 billion from $2.57 billion.

In the U.S., CE products accounted for 37 percent of Best Buy sales, flat with a year ago, while home office was 37 percent, up from 35 percent, the company said. Entertainment software declined to 13 percent of revenue from 15 percent, while appliances and service each were six percent, against five percent and seven percent, respectively, a year ago.