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Best Buy Q2 Profits Up as Q3 Expectations Push Stocks Down

13 Sep, 2005 By: Holly J. Wagner

Best Buy's profits for the second quarter rose 25 percent from last year's comparable quarter, but the market punished the chain for the expectation of missing its third-quarter targets with an 11 percent drop in Best Buy's stock price.

The company's stock lost $5.47 per share from its Monday night close at $50.36 per share to $44.79 at market close. Pundits blamed Best Buy for driving the market lower, because the chain is a bellwether of retail health.

CFO Darren Jackson told analysts Best Buy executives believe automakers' employee pricing discounts and high gas prices are pulling consumer dollars away from spending on consumer electronics and other entertainment products.

"It is hard to predict the effects of these trends on North American consumers," he said. The impact from Hurricane Katrina damage is not expected to affect the bottom line, executives said.

Entertainment software sales were down 7.2 percent from the comparable quarter last year, which executives blamed on weak DVD and CD release slates.

"As relates software and in particular DVD, there are a number of tests in the market right now that try to balance the promotional spend vs. traffic against the lifetime value of a new DVD customer," said Ron Boyer, EVP and general merchandise manager. "With centricity, we have begun to look at customers more than transactionally. We're trying to change our thinking about the cost of acquiring that customer with DVDs. We are thinking a little bit differently about how to balance the initial margin vs. lifetime value of that customer."

The chain is experimenting with rebalancing stock to change customer flow and should have results from 100 stores after the holidays, he said, adding that PSP and Xbox 360 are expected to be among the holiday traffic drivers.

The company's customer centricity strategy, in which stores are made over to cater to specific consumer segments, is yielding comp-store sales more than double the chain average.

That's fueling the chain's drive to open more new stores – plans for this year now call 72 new stores instead of the previously announced 60 – and aggressive conversions to the new model. Of the chain's 870 North American stores, 187 operate under the customer centricity model, another 58 will have been converted by October in preparation for the holiday selling season and the chain has designated another 50 for conversions by next February.

During the quarter Best Buy hired another 1,000 Geek Squad agents for a total around 9,400, including 950 home theater installation specialists. The chain operates Geek Squad departments at many core stores as well as 10 freestanding locations.

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