Best Buy Earnings Tank, But Brand Positioning Solid

Best Buy, the nation's leading electronics retailer, posted disappointing first-quarter profits--but says it is confident that its problem-solving brand positioning will pay off.

Short-term, there is plenty of bad news: While first-quarter revenues for the Minneapolis-based retailer increased 14% to $7.9 billion, earnings sank 18% to $234 million.

"Our first-quarter results fell short of our expectations," the company says. "Strong revenue results from lower-margin products significantly cut into our gross profit rate." Overall, same-store results gained 3% in the quarter.

But long-term, company executives say they are confident Best Buy's core marketing and merchandising strategies are working, and that the company will continue to outperform competitors.

In a conference call discussing the results, execs were particularly bullish about the strong growth in its Magnolia Home Theater unit, which helps people deal with the baffling mysteries of flat-screen TVs, and the Geek Squad, which simplifies people's computing needs. Growth in those units are in the triple digits and double digits, respectively.



"We've got to touch consumers where they live, and solve problems in their home," execs said. "So we're driving this business to build a relationship with our customer. We're just building the trust in making this crap work right now, and candidly, consumers just want their lives to be better."

The investment in solving technology problems "is extending our lead over the competition," said Brian Dunn, Best Buy's president and COO on the call. "Our market share is at an all-time high, and so are our customer satisfaction scores. Moreover, we're nowhere close to the end of the story on improving the customer experience."

The company lowered its earnings outlook, but says it believes revenue projections are on target.

"Early evidence suggests that consumer spending will be more difficult to predict this year, but it appears to be accelerating in lower-margin categories," said Darren Jackson, Best Buy's executive vice president of finance and CFO. "We are confident that flat-panel TVs, notebook computers and gaming will remain very appealing to our customers."

While the flat-screen TV massacre continues to pressure profits throughout the industry, Best Buy says it is comfortable with inventory levels.

The company's multichannel efforts continue to gain: Online revenue grew nearly 25% in the first-quarter.

Execs say the company is also enthusiastic about the prospects for Best Buy Mobile, its phone sales unit, as well as its Apple store-within-a-store concept. It plans to have 300 Apple stores in place by the holiday period.

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