Best Buy Q2 Margins Rise on Smartphones, But TV Sales Weak

Best Buy estimates that its overall market share fell slightly in Q2, “and the biggest drivers of it were lower share in mobile computing, entertainment software and moderating market share gains in home theater due to last year’s digital conversion,” CEO Brian Dunn said on a conference call. “We believe, however, that we'll see overall share gains in the second half of the year."

It “still holds true,” as in Q1, that consumer spending is “episodic,” Dunn said. “Many customers are being highly selective about when they spend their money. We believe, however, that this will change in our favor over the back half of the year. Customers traditionally rotate their spending to our categories during the holiday shopping season, and a strong lineup of products coming across the board reinforces our confidence."

Best Buy sees 3D gaming as “driving a bit more interest in 3D television,” Dunn said. “We see IPTV becoming more interesting in the second half of the year to the consumers. And I think the long and short of it is, I do believe that customer is not only episodic, I think the customer is turning his or her wallet through sort of a just-in-time need basis. I think as we get into the back half of the year over the last few years, we've seen this trend accelerate, and the consumer is moving to CE and connected solutions, which is sort of right in our sweet spot."

TV same-store sales fell Q2 because “we had a difficult comparison versus last year, and the overall industry was down,” Dunn said. Despite “the overall weakness in TVs, Magnolia, which serves the premium customer segment, had a great quarter, showing us the healthy demand for a premium home theater experience,” he said. Magnolia’s strength was “an encouraging sign and a good leading indicator, considering the innovations in home theater we see coming in the quarters ahead,” he said.

Before the holidays, Best Buy will “reset” its in-store assortments to increase space for smartphone, e-readers and gaming, Dunn said. The chain plans a particularly “heavy emphasis on new gaming platforms and pre-owned game titles,” he said. To accommodate the change, the space for Best Buy’s music CD sections “will shrink,” he said.

Average TV selling prices haven’t declined “significantly” at Best Buy, Mike Vitelli, president-Americas, said in Q-and-A. But even if ASPs of the higher-end LED-backlit LCD TVs and 3D TVs drop in the second half, “it won’t change the margin rate dynamics,” he said. “It may change the absolute selling prices in dollars a bit, but it will add a lot more people into the marketplace, which we believe will be extremely positive overall for the industry and for us. So the margin rates of the technologies are maybe not as different as you may be anticipating."

Best Buy saw little uptick in its TV business despite the start of football season, Dunn told an analyst. “Generally, the overall TV industry has been relatively flat,” he said. “I think it is partially because the industry hasn’t been very promotional in the first half, and in fact we know that it’s going to get more exciting promotionally in home theater in the second half. I think there has been a lot of pent-up demand, both from [the] consumer point of view and from a manufacturer and retail point of view to get some exciting promotions going, and I think we are going to see more of that in the second half.”