Best Buy's Q2 earnings fall on margins, labor

Videogame sales gains offset by drop in CD, DVD revenue

By Danny King -- Video Business, 9/16/2008

SEPT. 16 | Best Buy’s fiscal second-quarter earnings fell 19% as sales of lower-margin items such as videogames and notebook computers outpaced other categories, while the company spent more on labor for its back-to-school season. A jump in U.S. gaming revenue was offset by a drop in sales of CDs and DVDs.

Net income for the quarter ended Aug. 30 was $202 million, or 48¢ a share, down from $250 million, or 55¢, a year earlier, as sales rose 12% to $9.8 billion, the largest U.S. electronics retailer said today. Overall same-store revenue rose 4.2%. The company was expected to earn 57¢ a share on sales of $9.73 billion, the average analyst estimates in a Thomson Financial survey.

Gross profit fell slightly as the company gained U.S. market share in videogame software and consoles, whose margins are less than other electronics items, Best Buy chief financial officer Jim Muehlbauer said on a conference call with analysts. Other costs rose as the company boosted promotional spending and increased labor later in the quarter.

The stock fell about 7% on the news.

“This quarter’s earnings were below our expectations, something we’re never happy about,” said Best Buy president Brian Dunn on the call. “When the world’s most resilient economy improves, we’ll be poised to benefit.”

U.S. consumer electronics same-store sales rose 2%, less than the company’s 5.3% overall same-store sales increase. Flat-panel TV sales rose more than 10%, more than offsetting a drop in revenue from projection TVs and MP3 players. Same-store sales of entertainment software were flat as the surge in videogame software and console sales was canceled out by a drop in DVD and CD revenue.

Best Buy said yesterday that it agreed to acquire digital-music provider Napster for $121 million. The acquisition was “a fair value” and “could prove to be an important first step for Best Buy over the long term in becoming a provider of digital media content,” Piper Jaffray analyst Mitchell Kaiser wrote in a note to clients yesterday.