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Best Buy 3Q Revenue, Profit Decline

14 Dec, 2010 By: Erik Gruenwedel

Disappointing sales of high-end televisions, entertainment hardware and software contributed to Best Buy Co. posting third-quarter (ended Nov. 27) income of $217 million, down 4.5% from income of $227 million during the prior-year period.

The results included the annual (and key) Black Friday weekend.

Same-store sales in the United States declined 5% (down 3.3% globally) with overall revenue totaling $11.9 billion, down 1.1% from $12 billion last year. Domestic revenue totaled $8.7 billion, compared with $8.9 billion last year.

Significantly, consumer electronics hardware sales fell 10.6%, compared with a gain of 8% last year.

Entertainment software revenue, which includes movies, music and video games, fell nearly 14%, compared with a decline of 11% last year.

“Results in the domestic segment were lower than we expected,” CEO Brian Dunn said during a call with analysts.

Dunn said comparable sales of TVs dropped double digits as consumers hedged on purchases of new units featuring expanded features, such as Internet connectivity and 3D, and opted instead for discounted units.

“Newer technologies like 3D and IPTV, which we assort more broadly than anyone, have been slower to take hold,” he said.

The CEO said he expects connected TVs to eventually take off, underscored by overall sales of connected devices up triple digits.

Dunn said lower-than-expected sales of 3D and IPTV units mirrored overall industry concerns regarding the two technology improvements the CE industry expects to drive high-end TV sales.

He said a dearth of 3D movies and confusion with 3D gaming contributed to slow 3DTV sales. Dunn said the concept of IPTV and what it can offer consumers in the home remained a blur.

“I think the idea and the notion of [IPTV] is still really new, and I don't know if it is by itself enough to get people off the couch and buy a new TV,” Dunn said. “We're confident [connected TVs] will take off, and when they do, we expect to benefit from being the leader [via Magnolia Home Theater].”

Bright spots in the quarter included sales of smartphones and tablet computers, including the Apple iPad.

BestBuy.com tallied 40 million visitors during the quarter, generating a 7% increase in revenue. Dunn said 40% of online purchases were picked up in stores.

The decline in hardware sales bode poorly for Best Buy’s digital platform CinemaNow, according to Eric Wold, analyst with Merriman Curhan Ford in New York.

Best Buy, along with other retailers such as Walmart, Sears, and Kmart, among others, have aggressively sought to establish digital stores supported by Sonic Solutions’s RoxioNow distribution software.

RoxioNow is considered key to third-party retailers offering transactional video-on-demand movies, which studios hope will supplant weakening physical media sales.

“While Best Buy is not the only retailer selling products installed with RoxioNow/CinemaNow, we believe Best Buy is one of the more important retailers, and the expectations for market share losses by management is not a positive for Sonic Solutions’ outlook,” Wold wrote in a note.

The analyst said checks of Best Buy locations found mixed messages regarding the awareness of and marketing of the CinemaNow product. Despite the installation kiosks to educate consumers, including offering CinemaNow gift cards with some consumer electronics purchases, Wold found a low level of awareness by the salespeople themselves (with some not even knowing what CinemaNow was or that it was included within the devices).

“Given that we believe most consumers need to be educated on CinemaNow before they leave the store, we believe this (if it signals a chain-wide trend) could negatively impact consumer awareness and trial of CinemaNow and make for a larger hill to climb in future periods to drive utilization,” Wold wrote.

With the results including Black Friday and the immediate post-Thanksgiving holiday shopping period, Wold said he remains concerned about the weaker-than-expected guidance for the key Christmas holiday shopping period (the February quarter).

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