BEST BUY POSTS 3RD-QUARTER GAIN BUT CIRCUIT CITY REPORTS LOSS

At same time, operating loss at its Musicland group plunged to $85 million from earlier forecast of $10 million as same-store sales fell 11.5% amid slump in CD sales that tracked industry average of 10% decline, Best Buy said. As result of deeper operating loss at Musicland, Best Buy hinted at possible closings of Sam Goody mall-based outlets and was “reassessing” all locations as leases expired, Exec. Vp Darren Jackson said. Sam Goody, which has 800 stores, has been “disproportionately” affected by price competition in music CDs from discount chains, which have promoted front-line titles at $9.99. Best Buy’s overall gross profit was flat in 3rd quarter at 21.6% despite competitive holiday selling season that saw entry-level DVD prices fall to $39 and DVD/VCR combos to $98.

Downturn at Sam Goody, which Best Buy acquired as part of purchase of Musicland in 2001, came despite chain’s efforts to deploy new merchandising strategies including adding videogames and DVDs to offset decline in CD sales. Best Buy also tested addition of CE products to Sam Goody, but since has scaled back plans. “Sam Goody has an image in the mind of the consumer as the place to buy music,” Musicland Pres. Kevin Freeland said, noting there was “softening” in videogames at Sam Goody in quarter. Best Buy also has expanded DVD software assortment at Musicland chains Suncoast Motion Picture Co. and Media Play, former replacing some VHS titles, he said. Performance of Musicland dragged down results at Best Buy stores that had 0.7% gain in same-store sales, while those at Magnolia Hi-Fi were up in low single digits, it said. “We can’t cut expenses fast enough [at Musicland] to make up for the decline in same-store sales,” Jackson said. Increased sales at Best Buy were tied digital products, which accounted for 23% of revenue vs. 17% year ago, with digital TVs producing 45% of total TV sales, up from 25% last year. In increasing sales of DTVs, Best Buy now is carrying 5 plasma display panels and dozen LCD TVs.

On downside, desktop PCs and major appliances had “mid- single” and “double-digit” declines, respectively, in quarter, Best Buy said. Digital entertainment software including DVDs, videogames and PC software also registered “low single-digit” drop in same-store sales, it said. With sharp drops in desktop PCs, major appliances and music CDs, company has “given some thought” to either replacing categories or scaling them back. To that end, it will test new product categories in 2003 that target either specific geographic region or customer segment, Vice Chmn. Bradbury Anderson said.

In Canada, where Best Buy opened 8 stores in Toronto area this fall, chain reported $4 million operating loss, reversing $3 million profit year earlier. Sales, which include those of Future Shop chain Best Buy acquired last year, rose to $424 million from $354 million on 3.8% gain in same store sales. Gross profit improved to 23.2% from 22.2%. Best Buy and Future Shop had strong sales in 3rd quarter despite sharing Toronto market, and have moved to co-branding strategy, company said.

Meanwhile, Circuit City, citing costs of remodeling and relocation program that covered 71 and 13 stores, respectively, swung to $17.8 million 3rd-quarter loss from $27.7 million profit year ago. Circuit spent $11 million in quarter on program, up from $2 million last year. Overall, Circuit remodeled video departments in 301 stores this year to include expanded offerings of plasma display panels and LCD TVs and upgraded lighting in 311. It plans to remodel 5 stores and relocate 2 others by Feb., CEO Alan McCollough said. Sales increased 7% to $2.42 billion on 6% gain in same-store sales. Gross margin declined to 22.6% from 24.4% year ago on slower sales of DBS and wireless products.

McCollough described Thanksgiving weekend sales as more promotional than in past and said Circuit would remain “competitive” at entry-level prices, something it had pulled back from in recent years. Circuit promoted 38W RCA direct-view HDTV earlier this month at $1,499, about $500 less than previous price, and had Panasonic 56W HD-ready set at $1,299. “For a while we backed off entry level pricing, but we decided we can’t afford not to play,” McCollough said. “We're much more visible with market pricing on CDs, DVDs and other products.”

Circuit didn’t outline specific store plans for 2003, including how much would be spent on remodeling or relocating its remaining 300 or so stores in 2003. While Circuit has tested and abandoned new store formats in past, “our intention is to continue to refresh our base,” McCollough said. Evidence of possible change can be found in store near Circuit’s Richmond, Va., hq that opened this fall to serve as “laboratory” to test new designs, Richmond Times-Dispatch reported. In new layout, DVD titles are front and center filling space typically occupied by digital cameras and imaging products in other stores, Times- Dispatch said. Music CDs and PCs have been pushed to left and right sides of store, respectively, from center and TVs were shifted to back from typical position at front. Red Dot machines are located throughout music and video departments to allow customers to listen to CD or watch video. Circuit’s trademark “racetrack” also has been replaced by single-surface floor.