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Profits Down and Layoffs for Best Buy, Despite Blu-ray Sales Growth

16 Dec, 2008 By: Erik Gruenwedel

Despite double-digit sales increases of Blu-ray players, Best Buy Co. Dec. 16 said macroeconomic conditions continued to batter consumer confidence and spending.

The Minneapolis-based No. 1 consumer electronics retailer said third-quarter (ended Nov. 29) profit fell 77% to $52 million, compared to income of $228 million during the previous year period. To circumvent the possible effect of a prolonged recession, Best Buy said it would offer nearly all of its 4,000 corporate employees a voluntary separation plan, which includes increased weeks of pay, health care and dental coverage.

“We want to reduce the number of involuntary separations,” said Brad Andersen, vice chairman and CEO, in a call with investors.

Best Buy representatives maintained the company has always attempted to recognize and reward store employees, underscored by the fact the proposed layoffs didn’t involve its nearly 150,000 store-based staff.

Overall revenues for the third quarter topped $11.5 billion, up from $9.9 billion during the same period last year, due largely to 94% increase in foreign revenue to $3.3 billion compared to $1.7 billion during the same quarter last year. U.S. revenue for the quarter declined 1.3%, to $8.1 billion, from $8.2 billion during last year’s third quarter.

Same-store sales in the United States fell 6.3%, compared to a gain of 6.1% last year.

Principal factors included a CE same-store sales decline of 13.7% (primarily due to lower HDTV sales) and 12.4% decline in entertainment software revenue, which included music CDs, and standard DVD and Blu-ray disc movies.

Appliances (21%), home office (11.1%) and consumer service segments such as the Geek Squad (1.3%) all experienced same-store revenue increases.

Best Buy said its domestic CE revenues in November declined 3%, compared to an industry average of 25%, citing consumer-spending analysis from MasterCard.

The retailer reported an increase in gross margins to 24.9% from 23.5%, which it attributed in part to the bankruptcy of No. 2 CE retailer Circuit City Stores.

“While we were disappointed in the absolute results for the quarter, they were strong relative to most of our peers,” said CFO Jim Muehlbauer. “We believe we continue to see healthy market share gains.”

Despite the incremental gains, however, company executives portend a cloudy future.

“The environment for consumer spending is likely to get worse before it gets better,” Andersen said. “While lower energy costs are an offset, we anticipate companies will be laying off more employees, which will exacerbate the decline in consumer confidence, uncertainty and weakening demand.”

Andersen said the retailer projects a period where consumers may significantly shift their spending behaviors, which could have a dramatic impact on retailing.

“We are preparing for a wide range of outcomes next year, including significant same-store sales declines,” he said.

It said it would cut capital spending 50% in 2009 compared to $1.2 billion in spending in 2008, which included a significant reduction in the number of new store openings domestically and abroad.


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