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Best Buy Q2 profit down 19%, but revenue rises 12%; maintains FY09 EPS forecast - Update 2


Tuesday, Best Buy Co., Inc. (BBY), an electronics retailer, reported a 19% decline in second quarter profit, despite a 12% increase in revenues. The company noted that gains from new store openings, strong comparable store sales and share repurchases completed in the last fiscal year were offset by an increase in planned investment spending for strategic growth as well as a modestly lower gross profit rate. Additionally, the company maintained its earnings outlook for fiscal 2009.

The Richfield, Minnesota-based company said second quarter net earnings dropped to $202 million or $0.48 per share from $250 million or $0.55 per share reported in the same period last year. On average, 23 analysts polled by First Call/Thomson Financial expected the company to earn $0.57 per share for the quarter.

The earnings decline was primarily due to the increase in the company's investment spending for enhancements to U.S. stores, such as the rollout of Best Buy Mobile to the remainder of its stores, the reset of the GPS selling space, and additional investments in store labor. Additionally, the company continued its international expansion, investing in people and technology to expand its presence in China and prepare for its first stores in Mexico and Turkey. The company also reported lower investment income.

Revenue for the period improved to $9.801 billion from $8.750 billion reported last year, exceeding Street estimate of $9.67 billion. The revenue increase was partly due to the net addition of 156 new stores in the past 12 months. Domestic revenue grew 12%, while International revenue increased 10%.

Comparable store sales gained 4.2%, compared to a growth of 3.6% in the prior year, owing to an increase in the average ticket as the company's revenue mix continued to shift to larger-ticket items like flat-panel TVs, notebook computers and mobile phones.

Operating income declined to $339 million from $401 million in the previous year. The company reported investment income and other of $9 million, a decline from $22 million in the prior year.

Selling, general and administrative expenses rose to $2.042 billion from $1.738 billion in the previous year. The rise was mainly due to increases in store labor to support the Best Buy Mobile operating model and planned investments in customer-facing labor.

Cash and cash equivalents at August 30, 2008 was $656 million, while it was $1.390 billion at September 1, 2007. Merchandise inventories for both periods were $6.105 billion and $4.650 billion, respectively.

For six months, net earnings dropped to $381 million or $0.91 per share from $442 million or $0.94 per share in the year-ago period. Revenue increased to $18.791 billion from $16.677 billion in the previous year.

Commenting on the results, Brad Anderson, vice chairman and CEO of Best Buy, said, "…we have some work to do in terms of managing our expenses amid a challenging macro economic environment. We plan to continue our growth investments and reduce our lower-priority spending in order to continue our customer support in the second half."

Looking ahead, the company reiterated its earnings outlook of $3.25-$3.40 per share for fiscal 2009, up about 7% from last year. Analysts expect earnings of $3.10-$3.44 per share with the consensus being $3.28 per share.

Revenue for fiscal 2009 is expected to be about $47 billion, including the impact of new store openings as well as a comparable store sales gain of 2%-3%. The Street expects revenues of $44.72 billion.

The company now expects a comparable store sales gain for fiscal 2009 in the upper half of its previously disclosed range of 1%-3%.

Second-half comparable store sales gains are estimated to be lower than the first-half gain of 4.0%, primarily due to macro-economic headwinds and the cessation of government fiscal stimulus checks.

On September 12, analysts at UBS had downgraded the company's stock to "Neutral" from "Buy".

BBY is currently trading at $41.08, down $2.62 or 6.00%, on 9.95 million shares, compared to a 3-month average volume of 7.15 million shares. For the past year, the stock trended in the range of $36.10-$53.90.

by RTTNews Staff Writer

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