TV Sales Down in ‘High Single Digits’ in Best Buy’s Q1; Tablets, Nascent E-Readers See Strong Growth

Citing “better than planned” sales, Best Buy CEO Brian Dunn said in its Q1 2012 earnings call Tuesday the company’s “connected world vision” is paying off. Total domestic connections grew 20 percent for the quarter, which Dunn attributed to momentum of Best Buy Mobile and the “rapid growth of connections” in its TV and computer business. Growth in tablet sales, led by the iPad 2, was the biggest catalyst for improved mobile computing numbers, while notebook PCs edged up over “steeper declines” the category suffered in the second half of fiscal 2011, Dunn said. Still early in the tablet age, Best Buy has “been able to sell virtually everything that we are getting as this category continues to generate excitement,” said Mike Vitelli, president, Americas.

As part of its plan to “leverage our scale” to grow sales of tablets, mobile phones, appliances and gaming, Best Buy began its Tablet Central zone within computer departments in May and expects it to be in all big-box stores by July. The tablet zone showcases features, connections and accessories for tablets, which the company believes will show Best Buy’s “strengths of demonstrating new technology,” Dunn said. The tablet space is “heating up now and our vendor partners are aggressively advertising to build awareness,” he said. The company expects to have the “strongest assortment” of tablets in the market with a wide range of features and price points, Dunn said. The full impact of Tablet Central is still months ahead and will track with emerging players in the tablet market as they roll into stores in July and August, Vitelli added.

As expected, TV comparable store sales were down by “high single digits,” said Chief Financial Officer Jim Muehlbauer, following a similar trend in Q4 2011. Due to the stalled economic climate, Best Buy continues “to plan for a modest near-term outlook in this category,” Muehlbauer said. Vitelli said the retailer is seeing a boost in demand for larger screen sizes, fitting company strategy to focus on that area. He said the first quarter is typically a period of “new products and resets” and “it’s still early in the year,” reiterating the company’s “modest expectations” for the category. Dunn said the company is pleased with results of the mix in its higher-end Magnolia stores.

Referencing Best Buy’s private-label Dynex and Insignia TV brands, Vitelli said the exclusive brands are a “significant part of our unit growth” in the video category. With the exclusive brands, Best Buy gets “blue-label products” with unique features the sales staff can demonstrate to consumers. Vendors like the arrangement “because these are products that have higher ASPs, higher margins for everybody,” he said. “It plays out well for both sides."

In digital imaging, component shortages resulting from the earthquake and tsunami in Japan are impacting digital camera sales, Muehlbauer said. The retailer expects product availability to improve later in the year.

Smartphones continued to be strong for the chain as Best Buy Mobile delivered comps of 28 percent “with strong margins,” Dunn said, saying Best Buy was a “lead retailer” for the launch of Verizon’s iPhone. Best Buy opened roughly 20 standalone mobile stores in Q1, bringing the total to about 200 locations. It also expanded the Mobile footprint in 600 big-box stores, Dunn said. Referring to the value of Best Buy’s cross-marketing capability, Dunn cited a promotion in the quarter that bundled a free smartphone with Lady Gaga’s latest CD, which delivered one of the mobile group’s “best weeks of the year,” with number one market share of the physical CD.

In gaming, sales trends were higher following the launch of Nintendo’s 3DS during the quarter, Dunn said. Overall gaming performance is a positive sign, as it reflects changes the company is making in that business, Dunn said. Regarding changes to the gaming business, Dunn said Best Buy has made progress in how it approaches “the full life cycle of the gaming customer.” The model is still a work in progress but a first step it has taken is to position a dedicated desk in the gaming department with an adjacent pre-order touchscreen “to help customers find games they want.” Results show that when the pre-owned trade-in desk is within the game department, both trade-ins and pre-owned sales improve by two to one, he said. He said customers can trade in used games and receive a Best Buy gift card redeemable for anything online or in store. “About half” of the card value is being spent outside of the game department, which Dunn said shows “that our value proposition truly is adding value and differentiating.” He reiterated the company’s commitment to driving its gaming business by detailing a promotion Best Buy announced at E3 last week. The retailer will give more than two million Reward Zone Gamers Club members $100 in points to spend on anything in the store or online when they pre-order and buy five games, he said.

Sales for the quarter were driven heavily by promotions. “Our ability to create compelling offers that cause customers to respond shows that our operating model has elasticity and that we are clearly selling products and services at values consumers can’t pass up,” Dunn said. Regarding upcoming promotions, Muehlbauer said Best Buy will “follow the customer where the customer wants to be based on the categories that they have the most interest in.” In Q1 Best Buy identified areas where it thought it could “benefit from customer traffic early,” in the gaming, appliance and computing businesses and was pleased with the results, Muehlbauer said. Dunn expects the rest of the year to be typically competitive. He doesn’t believe margin rates will continue as they performed in Q1, but said “it’s in the consumers’ hands.” The plan is to grow operating income by zero to 7 percent, he said. “As you know from our history, a lot of the margin rate that we see, especially within our domestic business, is driven by the types of products that people want to buy."

Internationally, revenue and operating profit “grew significantly,” Dunn said. Five Star, based in China, was up to 170 stores at the quarter’s close, and saw comp store sales move up 9 percent, following 30 percent inclines the prior year, he said.

Following up on initiatives the company discussed during its recent Analysts’ Day, Dunn said the company is “determined to double” its online business in the U.S. in the next three to five years, and was on course to do that in Q1 with double-digit growth. Expanding product assortment is key to the plan, he said, saying the company has added more than 10,000 SKUs to its online portfolio since Q1 of last year. Leveraging physical stores with Internet sales is another initiative to provide “greater points of presence,” he said. Mobile stores have differentiated traffic and attract a “unique customer base,” with 25 percent of shoppers, largely female, being first-time Best Buy customers. That’s higher than the proportion of female shoppers in the big-box stores, he said.

While still small in overall revenue, e-readers saw triple-digit sales growth in Q1, Muehlbauer said. Growth was strong enough “to meaningfully benefit our overall domestic comp,” he said. The growth of the category reinforces customer enthusiasm for mobile technologies, he said.

Q1 earnings at Best Buy were $136 million, compared with $155 million in Q1 2011, the company said. Revenue was $10.94 billion, up 1 percent over the comparable period last year. Operating income was down 10 percent to $282 million, the company said. Best Buy closed on Tuesday up $1.28 to $30.10.