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Best Buy Sales Up, Gross Margins Down

12 Dec, 2006 By: Jessica Wolf

Best Buy third-quarter revenue and same-store sales were up for the period ended Nov. 26, but gross margins took a hit thanks to a competitive HDTV market and the company's price matching policy on the big-ticket items.

Same-store comp sales were up 4.8% and revenue rose 15% to $8.5 billion for the quarter. Net earnings were up 11% to $150 million, but gross profit declined compared to the prior year, clocking in at 23.5% of revenue, compared to 2005's 24.4%.

Sales at BestBuy.com were up 30% in the quarter.

The all-important Thanksgiving weekend wrapped up the retailer's third quarter with double-digit sales growth, company executives said today in an investor earnings call.

The Friday after Thanksgiving, which Best Buy executives call Green Friday, is in truth literally more like “Red” Friday, said company CFO Darren Jackson.

However, whatever hits the retailer takes to gross margins, thanks to doorbuster pricing on that day, is mitigated by the market-share gains and consumer loyalty a well-executed, well-managed Black Friday can inspire, he said.

Thanks to a company-wide, customer-centric service overhaul, that's what Best Buy was able to deliver this year, said Tim McGeehan, EVP of retail sales.

“We believe we made the right choice with regard to margins,” said company CEO Brad Anderson. “If we had it to do all over again, we would have done exactly the same thing.”

The retailer also spent more on advertising in the quarter to support new gaming platform launches the PS3 and Wii in the quarter, as well as kicking off its holiday “Wow” campaign.

Those margin-gobbling HDTV promotions have already started to balance out in the fourth quarter, Best Buy executives said.

The company views the 75% of American homes that have yet to enter the HD market as an opportunity that will stretch into the fourth quarter of this year and beyond, executives said.

As of the third quarter, Best Buy had completed installing 136 new high-end Magnolia Home Theater store-within-a-store locations and had beefed up the traditional high-definition departments at 89 locations.

“We don't just look at it as TV business, we look at it as the home theater experience business,” said Brian Dunn, Best Buy president and COO. That business includes the whole package — sales of audio and ancillary products as well as extended warranty coverage and installation, which help boost the margins back up on a long-term basis, he said.

In product mix for the quarter, consumer electronics was the leading category, with sales making up 46% and gaining 9.7% in comparable store sales.

The entertainment software product group made up 17% of the company's third-quarter revenue, increasing 4.1% on a comp-store sales basis. Comparable store sales of DVDs decreased in the low single digits.

A solid double-digit gain in comparable store sales of video gaming was partially offset by an expected comparable store sales decline for CDs in the low double digits. The gaming strength was fueled by strong sales of existing platforms as well as the PS3 and Wii.

Early fourth quarter results are ahead of expectations, said company CFO Darren Jackson, and Best Buy will end the year with an overall 4-5% gain in comp-store sales.

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