Highlights From BBY's Q4 Conference Call: TV Market Down, But Expense Control Continuing; Issues Mixed Guidance

Best Buy Co. Inc. (NYSE: BBY) reported Q4 EPS of $1.98, $0.13 better than the analyst estimate of $1.85. Revenue for the quarter came in at $16.3 billion versus the consensus estimate of $16.29 billion. Shares are currently down 5.24%

Highlights From BBY's Q4 Conference Call:

• Sees FY12 EPS of $3.30-$3.55, vs. the consensus of $3.56. Sees sales of $51-$52.5 billion, vs. the consensus of $52.17 billion.
  
• (Brian J. Dunn, President and CEO) Adjusted margins that were up 90 basis points.
  
• We demonstrated expense control in the quarter. Total company SG&A was up only slightly as we reduced spending in response to the sluggish sales environment.
  
• Now looking back on the full year. We placed a restrained consumer in a difficult environment during the year especially in televisions. The TV market was down significantly last year, caused in large part by demand for IPTV and 3D TV, but did not materialize as the industry had anticipated. But despite these challenges, I'm pleased with how we responded and executed.
  
• Despite lower comps, our Domestic business adjusted gross margin was up 90 basis points. Overall gross profit dollars were up, and importantly, gross profit per square foot was up. Our cost control was good throughout the year. SG&A was up less than 5% for the year, which is an improvement from the previous year.
  
• Best Buy Mobile is the tip of the spear in our Connected World strategy and we gained share in the mobile phone category overall in the U.S. and particularly in the smartphone category. Best Buy Mobile also saw improvements in both Geek Squad Black Tie Protection and accessories over last year. Special appreciation goes out to more than 20,000 Geek Squad agents who enabled the highest and best possible customer service in store or at home.
  
• A good proof point of this was unit growth over 50% on air cards and MiFi devices that deliver mobile broadband service to computing devices.
  
• CD space was reduced by over 50% and that space was allocated to fast growing areas like Best Buy Mobile, e-Readers and seasonal impulse products.
  
• In the fall we launched a refresh of our gaming business. Customers can now buy and sell pre-owned games in approximately 90% of our stores, and we've also added preorder kiosks for new titles in all of our stores.
  
• I strongly believe Best Buy's business model is positioned for success this year. We're fully aware that consumers are still relatively constrained and some of our major categories are coming off challenging years.
  
• To sum it up, we are exploring and redefining what the optimal big box footprint is for us and we're finding ways to maximize returns through a variety of actions including extending many of our key categories that should increase customer footsteps every day. We believe a strong physical presence and a strong online presence is a major competitive advantage for Best Buy and a point of differentiation.
  
• Last year our U.S. Dot.com business sales were up significantly and according to our estimates, our market share was also up in this channel.
  
• We started ship-to-store and friends and family guest pickup. After these two additions were deployed, we saw a total in-store pickup go from approximately 35% to over 40% of all products sold online, and our Mobile Web and Apps business had the highest growth rate this year of any of our touch points demonstrating that we are increasingly serving customers where and how they want to shop.
  
• One last opportunity I'd like to briefly discuss is our international business. We've focused that business. We're investing strongly in the growth of Five Star.
  
• (Michael A. Vitelli, President-America Division) First, Mobile. Best Buy Mobile has been executing very well and we've gained share. But despite that strong showing our share is still only around 6%.
  
• We're seeing solid momentum in this business. We're growing the footprint of Mobile in our big box stores to add additional accessories. And as we announced last month we're planning to open an additional 150 Mobile standalone stores taking the count to a total of approximately 325 stores by the end of this year.
  
• In addition, our new buy-back program is especially relevant to Mobile phone consumers.
  
• Last year's hot product was the iPad and we had success with the iPad and now again with the iPad 2. As choice becomes more important in the emerging tablet category, we are best positioned to showcase the choices and inspire our customers to the art of what's possible.
  
• Another opportunity is appliances. Appliances represented 5% of our U.S. sales last year and we're still number four in the market.
  
• In gaming industry - a $20 billion business in which Best Buy is number 2 in hardware and number three in software and we currently have a very small share in pre-owned games. In order to improve our position and materially change the way we compete in this space, we're making investments in dedicated gaming labor in-store and online pre-order and trade-in capability and digital content.
  
• Second, we've added the ability to trade in used games at Best Buy for the more attractive Best Buy gift cards.
  
• (Jim L. Muehlbauer, Chief Financial Officer and Executive VP) This morning we announced adjusted fourth quarter diluted earnings per share of $1.98, which was up 9% versus last year.
  
• First in the fourth quarter, revenue declined 2%, driven by comparable sales decline of 4.6% and partially offset by new store growth. In our Domestic segment, fourth quarter revenues decreased almost 4% from last year to $12.1 billion as comparable store sales declined 5.5%.
  
• While on the surface this decline appears similar to what we experienced in the third quarter, the trend was actually modestly better when you look at the two year comp and consider that Domestic comparable store sales were up over 7% in the fourth quarter last year.
  
• The decline in comp store sales was driven primarily by a couple of factors. First, the industry continued to experience lower demand in key categories including TVs and notebook computers. Second, we were up against a nearly 40% comparable store sales gain last year in Mobile Computing, largely due to the launch of Windows 7.
  
• In Five Star, we experienced a low-single-digit comparable store sales decline as we began to lap significant year-over-year strength. For context, our Five Star comparable store sales growth was over 35% during the fourth quarter of last fiscal year. For the full year, Five Star experienced a comparable store sales growth of 18% in fiscal '11.
  
• Turning now to gross margins. The highlight for the quarter was again the continued expansion of our gross profit rate. Total company gross profit rate of 24.4% reflected a 40 basis point year-over-year improvement. The Domestic gross profit rate was up 90 basis points to 24.5%. The 90 basis point expansion can be attributed to overall flat rates and an improvement in mix due to continued growth in Best Buy Mobile and a lower mix of computing and entertainment hardware and software.
  
• Within the International segment, the gross profit rate of 24.2% reflects 120 basis points decline year-over-year, primarily driven by a higher mix of sales in the B2B channel in Europe, partially offset by strong margin improvements by both our Five Star and our teams in Canada.
  
• Turning to SG&A, fourth quarter expenses increased just 2% year-over-year to $2.7 billion. SG&A dollar growth was limited due to tight cost controls on variable spending items.
  
• Total inventory was up 7.5% year-over-year, compared to up 12% at the end of the third quarter. In Q4, growth from new stores and changes in foreign currency contributed approximately half of the inventory increase. Domestic comparable store inventory in Q4 was up 2% and reflected an improvement over the third quarter, which was up 8%.
  
• Second, our effective tax rate of 31.4% was lower than last year, and our expectations due primarily to the favorable resolution of several tax matters in the quarter and a higher proportion of our income from foreign operations, which is taxed at lower rates. We estimate the temporary reductions in our tax rate favorably impacted the fourth quarter and full-year earnings by approximately $0.12 and $0.11 respectively.
  
• And, lastly, we repurchased approximately 1.2 billion or 33 million shares of our stock, which is over 8% of the previously outstanding shares of the company during fiscal '11.
  
• Looking ahead to fiscal '12, we recognize that there continues to be many variables in the environment. It appears likely that macro influences, such as unemployment, housing and higher gas prices, may continue to pressure consumers.
  
• Given these competing factors, our fiscal '12 plans reflect a range of potential outcomes and are focused on making prudent investments in several profitable growth areas of our business while maintaining disciplined cost control. Our fiscal 2012 guidance calls for top line revenue of $51 billion to $52.5 billion, which is an average of 1% to 4% growth year-over-year.
  
• Additionally, we anticipate that the inclusion of the 53rd week during the fiscal fourth quarter will add approximately 1.5% to 2% year-over-year to our top line revenue. Partially offsetting these gains, is our comparable store sales estimate for the year of flat to down 3%, which reflects our current view of the range of potential outcomes in this environment.
  
• Looking at gross margins we expect to grow gross margins next year but at a more modest rate than in fiscal '11. We anticipate a large portion of this growth will be driven by further progress in our connectible categories led by Best Buy Mobile.
  
• Putting it all together, we are forecasting annual non-GAAP EPS of $3.30 to $3.55 for fiscal 2012, which represents a 4% decrease to 4% increase year-over-year excluding restructuring-related charges. This adjusted EPS guidance also excludes the impact of any potential share repurchases in fiscal 2012.
  
• One last thought on our outlook. Currently, we are not aware of any significant impacts to our business as a result of the recent tragedy in Japan. We are in contact with our vendor partners and suppliers, but recognize it is still too early for them to assess what impact if any this may have on our business in fiscal '12.
  
• (Q&A) You spoke a little bit about pricing and what you'd like accomplished over the next year. I was wondering if you can give us a little bit more of an example of how you create in a world of higher pricing transparency, how you create a better price image when, in fact, someone is doing a search, whether on a smartphone or other device, on SKU-specific pricing? (A) It's a great question. I would say the biggest singular thing that we're doing right now, and we began it in the second half of this year, is dramatically expanding our online-only assortment. These are the people that we're competing with that have very, very broad assortments, and what we're doing rather than just figuring out how to expand the assortment in the store is dramatically increasing the assortment online. For example, historically we'd carry 100 televisions. Using that as illustration, 100 televisions within the store. Now we'll have over 400 televisions online of which 300 hundred will be online only. That allows us to be very aggressive in the online-only pricing, because we have similar operating model there and compete effectively in that channel.
  
• If I'm allowed a follow on to that. How do you support that - how will you support the inventory needs? Is that through some sort of wholesaler? Or is that just keeping limited inventory in the central warehouse? (A) There's a variety of ways. Some of the SKUs we would own and would keep in the centralized warehouse. Others can be done through supply-direct facilitator there that are handled either by the site themselves or distribution. So there's a variety of ways to do it. But to your point, it's much lower inventory position. So a much higher return on inventory that way.
  
• I guess a question regarding CapEx. You talked about $800 million. Can you kind of break that down? I know you do it in the K, but can you break it down in more detail as far as new stores versus IT spending and where the biggest buckets are? And what you try to get out of it? (A) I'm going to turn it over to Jim in a second. This is Brian. The frame we've used in our CapEx allocations this year in the places where we have matured businesses where we are invested, like our big box business, our intention is to leverage those investments. It is also clearly our intent to deploy our capital in our human resource against growth areas some of which you heard about this morning. I think maybe, Jim, you can give a little color on what some of those growth areas are. (A) Yes. I'd be happy to. As you would expect as we have been lowering the number of big box new stores over the last three or four years our CapEx spending dedicated to U.S. big box growth has been coming down significantly. We've also been using money over the last couple years to remodel our existing stores and put value props in place where we know that there's high levels of consumer demand in spaces where our share is low like Best Buy Mobile. So what you see happening next year is while the capital is actually coming down a little bit year-over-year there is a shift in capital spending that's really been a continuation of a theme in that we continue to lower our big box capital spending but we're ramping up our capital spend on new profitable new models like Best Buy Mobile. And we're ramping up spending next year to support the profitable growth we see in China around our Five Star business as well.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Walmart (WMT) PT Lowered to $130 at UBS on Investment Narrative's Competing Dynamics
• Advance Auto Parts (AAP) Tops Q2 EPS by 22c; lifrs profit guidance
• Analog Devices (ADI) Tops Q3 EPS by 11c, Beats on Revenue; Offers Q4 Guidance