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Best Buy Q4 Profit Falls 16.5%

24 Mar, 2011 By: Erik Gruenwedel

Demand for Connected TVs, 3DTV slow to materialize

Best Buy Co. March 24 reported fourth-quarter (ended Feb. 26) profit of $651 million, down 16.5% from income of $779 million during the previous-year period. Home entertainment may be going digital, but the Minneapolis-based No. 1 CE retailer said consumers have yet to embrace drivers such as Internet-connected televisions and 3DTV.

In the United States, Best Buy said sales of entertainment hardware and software (such as music and movies) declined by low double digits.

“Overall demand for key consumer electronics products was a challenge for the industry last year,” said Brian Dunn, CEO of Best Buy. “The TV market was down significantly last year, caused in large part by demand for IPTV and 3DTV that did not materialize as the industry had anticipated.”

Dunn said the ongoing housing slump (new home sales fell a record 16.9% in February) and economic concerns kept consumers from spending on traditional CE drivers such as TVs and notebooks. Notable revenue drivers included mobile phones, tablet computers, in-home Geek Squad IT support, video games and appliances.

Indeed, Best Buy said it would add 150 stand-alone Best Buy Mobile stores in 2011, ending the year with more than 325 mobile-specific retail locations.

Dunn said Best Buy would aggressively seek to increase its 6% market share in mobile phones. In addition, the retailer is targeting video games to improve its No. 2 and No. 3 rankings in game hardware and software sales, respectively. Best Buy aired its first Super Bowl video game TV ad in February.

The retailer said it would expand its stake in sales of new and used games, including allocating increased store space and personnel resources for gaming and mobile phones. As a result, Best Buy said it has cut by 50% the retail space for TVs.

“We're determined to strengthen our position as a premier destination for all types of gamers,” Dunn said.

Domestic fourth-quarter revenue fell 4% to $12.1 billion from $12.6 billion last year. The decrease was driven by a comparable store sales decline of 5.5%, compared with a 7.4% same-store sales gain in the previous year, partially offset by the addition of net new stores in the past 12 months.

Best Buy said it would continue to assess its retail footprint, including expanding its online presence. The retailer said it would upgrade offerings of TVs (especially large screens) from 100 models to 400, with the additional 300 units available only online.

“We are exploring and redefining what the optimal big-box footprint is for us,” Dunn said. “We believe a strong physical presence and a strong online presence is a major competitive advantage for Best Buy and a point of differentiation."

That said, CFO Jim Muehlbauer said same-store sales would be flat to negative 3% in 2011.

Analyst Michael pachter with Wedbush Morgan Securities in Los Angeles said wide availability of low-cost Internet-connected media players such as Roku, Boxee, Apple TV, and video game consoles make buying higher-priced IPTVs a non-starter. Pachter added that 3DTV would remain dormant until increased content become available, including most importantly 3D channels.

"Due to bandwidth constraints, it is not clear that many 3D channels will be offered over the next several years, and we remain pessimistic that 3DTV will be widely adopted by any but the most hard core video gamers," Pachter wrote in a note.

The analyst also questioned Best Buy's ability to compete in the used video games, a market dominated by youth-centric GameStop stores. Indeed, GameStop reported record revenue and profit during its most recent fiscal period.

"The core Best Buy customer is far older than the typical customer that trades in games at GameStop," Pachter wrote.

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