Strong Super Bowl Made First Quarter Look Weak, Chain Says

Best Buy’s first quarter was a “rare” one, with the chain missing earnings targets, “yet our results appear to be better than others in our space,” CEO Brad Anderson told analysts. Best Buy met its revenue target, but more of the total mix was contributed by its lower-margin international businesses, said Chief Financial Officer Darren Jackson. Gross profit for the quarter fell 150 basis points, with international accounting for 60 points of the decline, Jackson said.

Best Buy U.S. sales skewed more heavily than expected to lower-margin gaming hardware and notebook computers, tallying another 45 basis points of decline, Jackson said: “All in all, while we feel like we performed very well where the consumer was ready to buy, we had expected a better profit picture in the quarter. What you don’t see in the first quarter financial results is that we continue improving key customer metrics and market share in a difficult environment.”

U.S. same-store sales growth, up 1.7 percent, “was lower than we had anticipated,” given the chain’s 5 percent fourth quarter increase, Jackson said. Growth in TV sales “slowed dramatically in the quarter due to softer consumer demand in the aftermath of strong Super Bowl sales,” he said: “Some consumers may have opted to make purchases in the fourth quarter, leading to a subsequent industry pause.”

The first quarter’s turn away from a string of earnings increases doesn’t mean “that people are changing their minds, turning away from technology and entertainment products and solutions,” said President Brian Dunn. Consumers “simply hit the pause button,” Dunn said. “It’s a timing issue, natural ebbs and flows of different aspects of our industry. Moreover, in the fourth quarter of last year, we may have fast-forwarded some of the business with terrific promotions” during the Super Bowl promotional period, Dunn said.

Football’s impact on TV sales “is not lost on anyone,” said Senior Vice President-Merchandising Mike Vitelli. Pre- Super Bowl “is a big part of what goes on in television,” Vitelli told an analyst questioner. “It’s one of the biggest parts of the year.” January 2007 was “one of the largest television months ever, if not the largest, and that indeed caused a little bit of a hiatus over the last couple of months,” he said: “So we're growing, we're growing faster than the industry. And the issue is we weren’t growing as fast as we were going to be in that little period of time. But we think that’s going to come back.”

Pricing in TV “actually has been great,” Vitelli told another analyst questioner. Comparing Best Buy’s first quarter with its fourth quarter, TV pricing changes on a cost per inch basis “has been virtually flat, which has been very good to see,” Vitelli said.

Best Buy has seen no evidence manufacturers are “dumping” 720p TVs for 1080p, Vitelli told an analyst. “Both technologies have a place,” Vitelli said. “There’s a technology difference and a price point difference.” Many entry-level LCD TVs and most plasma products are 720p, “and then there are appropriate steps that satisfy different customer needs,” he said. “We were pleased that we were able to move through our transitional inventory at the beginning of the year as the manufacturers were changing relatively quickly, much quicker than we did last year, where it took us close to six months, given how manufacturers came in at different points and time. And we were able to do that in less than three.”

Best Buy hasn’t “completely transitioned out of 720p,” Vitelli said later in the call. Best Buy “has both flavors of high definition in our stores,” though Best Buy thinks it has “one of the highest mixes” of 1080p of anyone because of its Magnolia presence, Vitelli said.