Best Buy's Q2 Earnings Rise 10%18 Sep, 2001 By: Hive News
Best Buy Co. Inc. on Tuesday reported net earnings of $85 million, or $0.39 per diluted share, for the second quarter ended Sept. 1, 2001, up 10% compared with $77 million, or$0.36 per diluted share, in the second quarter of last year.
"We saw continued gains in sales of higher-margin products, such as digital products," said Best Buyfounder, chairman & c.e.o. Richard M. Schulze. "The combination of stronger-than-expected consumer interest, a more profitable sales mix and tight controls on spending drove our earnings wellabove expectations. Both Best Buy and Musicland produced bottom-line results that were ahead of plan. I'm pleased with our ability to deliver these results in such challenging economic times.
"However, our enthusiasm over our second-quarter results is tempered by the tragic events of last week."
Total sales for the second quarter increased 31% to $4.2 billion from $3.2 billion a year ago. The sales increase reflected the addition of 66 Best Buy stores in the past 12 months, which brought thetotal to 439 stores, as well as the inclusion of sales from approximately 1,300 Musicland Group stores.Comparable store sales rose 2.8% amid strength in sales of entertainment software and digital products.
"We benefited from consumer preference for our store format and our products," Schulze added. "We anticipate that digital products, which reached 15% of sales at Best Buy stores in the second quarter, could represent 18% or 19% of sales in the fourth quarter."
Gross profit margins for the company were 22.8% of sales in the quarter, up 2.3% of sales compared with last year's second quarter. Sales in the entertainment software and consumer electronics product categories increased faster than sales in the home office category, which isprincipally made up of lower-margin personal computers, said the company.
The inclusion of Musicland results in the current year increased the company's total gross profit margin by 1.4% of sales in the quarter.
The SG&A expense rate was 19.2% of sales for the quarter versus 16.8% of sales in the second quarter of fiscal 2001. The inclusion of Musicland's higher expense structure accounted fornearly the entire increase, adding 2% of sales to the SG&A rate in the quarter. In addition, the costs associated with operating more new stores increased the expense rate, although that was partially offset by productivity gains throughout the business. On a pro forma basis the SG&A expenserate was essentially flat compared to the prior year's second quarter. Total operating income was 3.6% of sales for the quarter, equal to last year's second-quarter rate, as operating gains at Best Buy stores were offset by lower operating margins at Musicland.
Net interest expense was $10 million in the second quarter compared with net interest income of $9 million for the same period last year. The increase in costs was due to financing costs associated with the acquisitions of Musicland and Magnolia Hi-Fi, including an expense of $8.4 million (approximately 2 cents per share) related to the premium on $153 million of debt retired in August. In addition, the company experienced lower yields on its investment portfolio.
For the first six months, the company's total sales rose 28% to $7.9 billion, driven by the additional Best Buy stores and the inclusion of Musicland's results.
Comparable store sales were even with the prior year's period, as strength in consumer electronics and entertainment software offset soft sales of desktop computers. Gross profit margins in the first six months rose by 2.3% of salesdue to favorable changes in product mix as well as improved inventory control at Best Buy stores, andinclusion of Musicland results, which added 1.4% of sales. SG&A expenses rose by 3% of sales. Musicland's higher expense structure accounted for the majority of the increase, while thebalance came from investments in new stores and infrastructure at Best Buy. Total company operating income, impacted by Musicland's lower operating margin, declined to 3% of sales.
Year-to-date earnings per share totaled $0.65, which includes $0.11 cents per share of dilution fromMusicland. The prior year's earnings per share in the first half were $0.70.
Darren Jackson, senior v.p., finance and c.f.o., said, "It is premature to speculate on how consumers and the flow of product might be affected by the events of last week. We will monitor the situation closely and gauge our business carefully.
"Currently, we would expect comparable store sales to be flat to a positive 2% for the third quarter. We also would anticipate earnings per share in the range of 34 cents to 36 cents in the third quarter."
Total Best Buy store sales grew 19% to $3.8 billion on account of new store growth and a 2.8% comparable store sales gain in the quarter. The comparable store gains were broadbased, said the company, as sales increased in virtually every region of the country.
During the second quarter, Best Buy opened nine new stores. The company expects to open approximately 45 additional Best Buy stores during the current fiscal year.
Gross profit margins at Best Buy stores improved by 0.9% of sales, reflecting a higher-margin product mix and strong inventory management. SG&A expenses rose by 0.4% of sales, due to depreciation of investments in infrastructure and the cost of operating additional new stores, offset by productivity gains. Operating income at Best Buy stores increased 37% to $157 million, or to 4.2% of sales.
Average Best Buy store inventories decreased 4% compared with a year ago due to continued tight controls over purchases.
Musicland comparable store sales in the second quarter were essentially flat as double-digit gains in sales of entertainment software, including DVD movies and video gaming, were offset by continued softness in sales of prerecorded music.
Musicland's store count was unchanged. Gross profit margins declined by 2.7% of sales, as expected, as a result of a less favorable product mix, includingreduced sales of higher-margin prerecorded music and higher sales of lower-margin DVD movies.
SG&A expenses declined slightly, reflecting stringent cost control, said the company. Musicland's financial results, which are seasonally slower in the first half of the year, produced an operating loss of $9 million. The segment's results were slightly better than management's expectations due to cost controls, synergies from the acquisition and lower-than-expected remerchandising costs.
Musicland's results also included approximately $4 million in goodwill amortization for the quarter.