Thread: Best Buy's Profits Jump 37% in 4th Quarter

March 25, 2010, 1:30 p.m. EDT

Best Buy's profit, outlook redefine what's discretionary

NEW YORK (MarketWatch) -- Best Buy Co., the largest U.S. electronics retailer, reported a better-than-expected 37% jump in fiscal fourth-quarter profit Thursday as consumers, facing a still fragile economy, shelled out for flat-panel televisions, notebook computers and mobile phones.

Hot Stocks: Best Buy SurgesBest Buy's better-than-expected 37% jump in profit gives the retail sector a boost as the No. 1 consumer electronics retailer returned to growth in Europe and China and gained U.S. market share. Shares of Lululemon Athletica also pop. MarketWatch's Andria Cheng reports.
For today's consumers, those types of products are no longer deemed discretionary, Best Buy Chief Executive Brian Dunn said on a conference call.

"Staying connected has become a non-negotiable for millions of people and that some of the things we offer no longer fall under the category of discretionary purchases," Dunn said. "These solutions have become such integral elements in people's lives that they have little or no tolerance for any kind of disruption if things aren't working the way they want."

As a case in point, unit sales of flat-panel televisions, notebook computers and cell phones each experienced such large increases that they contributed to comparable sales gains in those categories even though their average selling price has been declining, Dunn said. Executives also said while notebook computers and flat panel TVs generate less gross margin, they actually yield higher returns because there are lower selling expenses and capital required for those sales.

To tap into the change in consumer trend, Best Buy is increasingly focused on a "connected world" strategy where it plans to feature services such as Internet or cable subscription along with the computers and flat panel televisions to help consumers in their bid to stay connected. Dunn said that training its people to work with and help shoppers walk out of its door with a complete working package would be its key differentiator. The company also has expanded its online sales 20% to a $2 billion business last year, with 40% of the sales being picked up in stores.

"They have to continue to demonstrate they'll be able to execute this connected world strategy that they'll increasingly focus on," said Barclays Capital analyst Michael Lasser, who has an overweight rating on the stock, in an interview. "They'll be given the benefit of the doubt."

In early afternoon trading, Best Buy /quotes/comstock/13*!bby/quotes/nls/bby (BBY 42.82, +0.16, +0.38%) shares jumped 5.3% to $43.36, leading the sector gainers.

Analysts said new technology such as 3-D TVs is expected to give specialty retailers led by Best Buy another lift as they face increased competition from the likes of Wal-Mart Stores Inc. /quotes/comstock/13*!wmt/quotes/nls/wmt (WMT 55.65, +0.04, +0.07%) . The Bentonville, Ark., retailing giant told MarketWatch it also plans to sell 3-D TVs this year. Wal-Mart's surprise: 3-D TV coming this year.

Aiming to steal a beat on competitors, Best Buy has tied up with Panasonic Corp. /quotes/comstock/13*!pc/quotes/nls/pc (PC 15.00, -0.14, -0.92%) to exclusively sell the Japanese electronics giant's first three-dimensional TV home-entertainment system bundle in the U.S. Best Buy seeks first-mover advantage with 3-D TV.

"Three-D is a different type of technology that requires much more hands-on sales. That gives the edge to a specialist" like Best Buy, Hudson Square Research analyst Scott Tilghman, who also has a buy rating on the stock, told MarketWatch.

International rebound

Rewriting Playbook on Movie Tie-ins with 'Dragon'Almost all of the merchandise for DreamWorks' new 3-D release, "How to Train your Dragon," will be carried exclusively by Wal-Mart, with the megaretailer as master toy licensee and active in products, package design and marketing. Andria Cheng reports.
The Minneapolis-based company on Thursday also gave a full-year outlook that beat Wall Street expectations and said it will resume share repurchase under its existing $2.5 billion program. Best Buy had suspended the move in the wake of the financial-sector meltdown.

Fourth-quarter net income rose to $779 million, or $1.82 a share, from $570 million, or $1.35, in the year-earlier period. The year-ago figures reflected restructuring charges.

Sales in the quarter ended Feb. 27 climbed 12% to $16.6 billion from $14.7 billion. Comparable sales, those at stores, call centers and Web sites open at least 14 months, increased 7%.

Analysts estimated Best Buy would earn $1.78 a share on sales of $16.1 billion, according to FactSet.

Best Buy forecast profit this year of $3.45 to $3.60 a share on sales of as much as $53 billion. Comparable-store sales are projected to increase 1% to 3%.

Analysts surveyed by FactSet estimated profit of $3.34 a share for the year on sales of $52.2 billion.

Fourth-quarter international sales jumped 15% to $4 billion and would have risen 5% excluding currency impact. Same-store sales rose 5.5%, topping analysts' estimates. They included a 34% jump in China and a 4% increase in Europe. Canada's results were flat after declines in the first three quarters of the year. The three regions had all reported lower demand in the third quarter.

"The primary driver of upside was international," said Tilghman. "Seeing gains across the three geographies was expected but not at this magnitude. China has definitely been a pressure; seeing such a strong reversal is a big positive."

In the U.S., consumers' average spending per transaction increased and Best Buy gained market share by about 2.6 percentage points in the three months ended Jan. 31.

During the quarter, U.S. sales rose 11% to $12.6 billion, with comparable sales rising 7.4%.

To spur sales, the company has expanded in Twitter.com and Facebook and increased Internet chat functions.

Outside the U.S., Best Buy is opening large-format stores in China and Canada and is opening its first store in the U.K.

Gross-profit margin narrowed to 24% from 24.6%, hurt by higher sales of less profitable notebook computers. Selling, general and administrative expenses fell to 16.3% of sales from 17%.

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