Best Buy Profits Jump 37% on Strong Holiday Sales

Best Buy (BBY), the nation's largest consumer-electronics retail chain, posted a 37% rise in fiscal fourth-quarter profits to easily surpass Wall Street estimates, helped by strong holiday sales of flat-panel TVs, mobile phones and computers.

For the three months ended Feb. 27, Best Buy said its net income rose to $779 million, or $1.82 a share, compared with $570 million, or $1.35, recorded in last year's fourth quarter, which included restructuring charges. Analysts, on average, forecast earnings of $1.79 a share, according to Thomson Reuters.

Revenue at the Minneapolis-based company advanced 12% to $16.6 billion from $14.7 billion. Same-store sales (a key retail industry measure of sales at locations open at least a year) increased 7%, the company said. Analysts were looking for revenue to come in at $16.1 billion, according to Thomson Reuters.

"Well Above Expectations"

"We delivered a comparable-store sales gain for the year, capitalized on market share opportunities and managed expenses to deliver a financial outcome well above the expectations we had at the beginning of the year," said Chief Financial Officer Jim Muehlbauer in a statement.

For the full fiscal year, Best Buy said net income rose to $1.32 billion, or $3.10 a share, compared with $1 billion, or $2.39, in fiscal 2009. Sales for the year rose to $49.7 billion from $45 billion a year ago.

For fiscal 2010, Best Buy said earnings are expected to come in at a range of $3.45 to $3.60, which would represent an increase of 10% to 14% in year-over-year EPS growth. Revenue is expected to increase to a range of $52 million to $53 billion, or a 5% to 7% gain over 2009. Same-store sales are projected to grow 5% to 7%, Best Buy said.

That earnings outlook stands well above Wall Street's forecast. Analysts, on average, currently predict full-year earnings of $3.37 a share on revenue of $52.1 billion.

A Shrinking Big Box

But going forward, Best Buy plans to put less stock on selling TVs out of its big blue boxes and seek profits in services and smaller stores. In a conference call with analysts, executives said the company will continue to slow down its square footage expansion in the U.S. and focus more on opening smaller locations featuring wireless services and other items for communications and mobile computing.

CEO Brian Dunn noted that most store openings this year will be smaller concept stores such as Best Buy Mobile, which can add a Best Buy presence in malls and other areas where a big box won't fit. Research shows those stores are adding sales, not cannibalizing the big-box stores nearby, and are attracting a new customer, especially women and young people, he said.

Sales during the recession showed that most common household electronics such as computers and cell phones are becoming commodities, said Dunn. Best Buy's sales during 2009 held up, despite the recession, because unit volumes rose enough to make up for price drops that were in double-digit percentage rates, he explained.

"Many of the things we offer don't fall into the category of discretionary purchases," Dunn said.

"Very Margin-Rich Sales"

Computers are now a household necessity and have become a much larger portion of Best Buy's sales, Muehlbauer noted. But he added that, as their prices have dropped, they've also put downward pressure on the retailer's profit rates. The opportunities to increase profits are in selling connected devices and the services that go with them. Cell phone and computer connection services are "very margin-rich sales," said Muehlbauer.

Best Buy stores are testing ways to reconfigure their floors to cross-sell more connected services and show how the hardware for sale can work with them, such as high-definition TVs and satellite service, said Michael Vitelli, president, Americas. He didn't give many details on the changes but said the stores that have made adjustments are seeing "substantial" improvement in sales and that should extend as the tweaks are rolled out into the entire chain.

The coming of 3-D TV is also helping perk up traffic at the big boxes, said Best Buy executives. "Customers and employees are excited about what they're seeing," said Vitelli. He added that adoption should take off once manufacturers settle on a standard for the 3-D viewing glasses. Said Dunn: "It really screams to me that innovation is not dead in TV."

Additional reporting by Mercedes Cardona