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Market Update Analysis: 
Best Buy Fourth Quarter Earnings Call
Author: Rozalina Destanova
123jump.com
Last Update: 4:42 AM EDT April 07 2008


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The consumer electronics retailer’s revenue was up 4% to $13.42 billion. Same-store sales declined 0.2%, despite growth in sales internationally. The decline at U.S. stores was 0.9%. The gross profit rate declined by 40 basis points, year-over-year, to 23.7% of revenue. Expense rate improvements in the domestic segment were partially offset by investments to support and to grow the international segment. For fiscal 2009, the company expects earnings of $3.25 to $3.40 per share.

 
Dan Wewer (Raymond James): Does the outlook for a drop in profits during the first half of the year assume an improving macro environment or does it assume that the company specific initiatives begin to gain traction by the second half of the year?

James L. Muehlbauer: Specifically towards our guidance as to how earnings will phase during the year, there are a couple of core assumptions. One is we think the back half is going to get better, based on number one is what we are doing internally to improve our results, so the initiatives that our store teams are going to take to grow with their customer. We know we are building traction as we speak and that traction will accelerate as we get towards the back half of the year. That is one key element. The other element is we are making investments to launch more Best Buy Mobile stores. Those initiatives will be up and running towards the back half of the year. The other thing that we are looking at is that we are counting on more of a stable macroeconomic environment. To what extent we are going to see that, I think it is anybody’s guess at this point in time but we know given the strength of the product offerings we have put out there and businesses like computing where we have added an assortment of new vendors and our computing business continues to be strong. We believe that we have opportunities to continue to build share in those spaces. Lastly, as we look at the television business, the broad range of assortment that we are going to have and the ramp up to the digital transition in 2009, we expect to see more impact of that in the back half of the year as well.

Dan Wewer (Raymond James): If you are a store manager in any market that is seeing a significant housing problem or employment problem and they are talking to their neighbors and they are seeing more of their neighbors losing their job, will they still be required to show a 1% increase or better in their sales budget?

Shari L. Ballard: It depends on what their hypothesis is. We could use a specific example - Phoenix and Vegas, which are fine because they meet the criteria. It depends on what their rationale is for why they are saying what they are saying. So if, for example, they believe they can not grow their store because of cannibalization, as an example, and then I am going to ask them what they have got available to them - what customers are they under serving today, how can we get at some of those customers? What I am looking at is orthodoxy and a mindset that says we have to grow this company we love. We have to grow store by store by store, which again is so not the hardest part of this job right now. The teams are there and they know that. It is more about understanding all the things you have got available to you at a local level to grow your business and so depending on what the specifics were of what the store manager was saying, if they were saying I do not think I am going to grow my business for the next X number of months because I need to do these things to better understand my customer needs, to get back into the community and build relationships with the community, I need to reengage my employee base because they do not feel like they are in a position to contribute to the growth of the company, or the environment is not conducive to that, so give me time to build that and then I think I can do A, B, and C, I would give them the time to do that because I think that is a rock solid hypothesis and I would be confident that they will learn their way to how to serve the customer. We understand that we have a responsibility to the customers and the new employees who are coming on board to do that.

Robert A. Willett: If you look at the business this year versus last year, our proposition across a number of fronts has dramatically improves, as has the experience. The critical thing is to move much more from a push model to a pull model, where we are providing tools, base management tools, tailored market assortment tools to understand the locality demand, and then giving much more empowerment to local GMs to make the difference. 80% of all stores will be broadly the same the world over but the reality is the importance is that 20% and how you flex that 20% and whether you try to do that centrally or locally, and we are setting out to do that locally, which is significantly different to what other people have tried to do. I would not underestimate the power of that or what that can drive in terms of gross margin and comp sales.

Scot Ciccarelli (RBC Capital Markets): As the flat panel TV category continues to mature and customers become more familiar with the product and start buying second and third sets, which may be outside the primary living room or family room, would you expect that to start to have an impact on size and installation rates and what would that mean for margins going forward in the category?

Mike Vitelli: We have factored that into our plan this year because we were a leader in getting the first flat panels into most homes in the United States. We think we are going to continue to be that leader of the first home for the many households that have yet to get there, but also recognizing that those initial customers are coming back for their second and third TV. It is a significant part of what our strategy has been in increasing small screen sizes. A dramatic increase and you will see it this year, in our Insignia brand levels in the store for people that are going to come back for a value second level piece. Those mixes that you are describing are in our plan as we factored it in going into this year because we see the same thing. There are multiple levels of people entering this marketplace at different points in time and we are perfectly positioned for everyone.

Scot Ciccarelli (RBC Capital Markets): Do you start to see a significant reduction in the install rate as you move into the second and third sets in someone’s home?

Mike Vitelli: There is no question that smaller TVs are installed less than larger TVs, and that is built into the factors, so we look at the install rates as how people do it of above 36-inch and below. I think that is the distinction. We do not expect a high attachment rate on smaller TVs because we know that is not what our customers do. Above 37-inch, it is a high percentage that we are able to get people to have the televisions installed because that is what they want to do. They want to hang them on the wall.
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