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Best Buy: Thorny times, rosy picture

What recession? Best Buy's CEO pushes forward with an aggressive expansion plan that includes more spending, despite a weakening economy and lackluster fourth-quarter results.

April 3, 2008 at 2:28AM
Melissa Douglas helped Paige and Karla Olson pick out an iPod for Paige's 17th birthday at the Best Buy in Apple Valley. Best Buy CEO Brad Anderson said he wants all the retailer's stores to carry products that fit the customers in an individual store's particular neighborhood.
Melissa Douglas helped Paige and Karla Olson pick out an iPod for Paige’s 17th birthday at the Best Buy in Apple Valley. Best Buy CEO Brad Anderson said he wants all the retailer’s stores to carry products that fit the customers in an individual store’s particular neighborhood. (Star Tribune/The Minnesota Star Tribune)

As the nation's largest seller of electronic gadgets and gizmos, Best Buy Co. Inc. would seem like just the sort of discretionary retailer that would take a pounding in an economic downturn.

In a February survey, only 19 percent of consumers nationwide said that they would spend money on consumer electronics in the next three months -- a 9-percentage-point decline over a year earlier and the weakest outlook since the survey firm, ChangeWave Research of Rockville, Md., began collecting the data in 2002.

Yet Best Buy has bucked negative economic trends before, and Chief Executive Brad Anderson is confident that the Richfield-based consumer electronics giant can continue to attract more people to its stores despite high fuel prices, tightening credit, a housing crisis and a worsening job market.

At a time when some other giant retailers are posting double-digit sales declines, Best Buy surprised Wall Street on Wednesday by announcing that it expects sales at stores open at least 14 months, known as "same-store sales," to rise 1 to 3 percent for its current fiscal year, which ends Feb. 28.

The retailer also said it plans to boost capital spending to an estimated $1.1 billion, from $800 million, and to move ahead with plans to open 140 new stores this fiscal year; Best Buy opened 155 last year. "This is based on the world as we see it now, and based on the caliber of our people," Anderson said in an interview.

This came the same day that Best Buy reported that earnings in its most recent quarter declined 3.4 percent from a year ago, with same-store sales off 0.2 percent.

But recession or not, there is cause for Anderson's optimism.

Best Buy has a highly profitable and expanding network of stores in China, and the company is rolling out Apple products to more than 600 stores through Apple "store-within-a-store" shops. And although the steady drumbeat of grim economic news has hurt consumer confidence, sales of flat-panel TVs, notebook computers and video games remain strong.

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Competitors' turmoil helps

What's more, Best Buy is benefiting from turmoil among its competitors. CompUSA is closing stores, and Circuit City Stores Inc. -- which reported a $207 million third-quarter loss -- last week said that it is shrinking its home-installation business in response to a slowdown in the housing market.

Best Buy should also benefit from a federal government mandate to switch to digital-only TV broadcasts by February, which could lead to a boom in TV sales in the latter half of this year. "For now, they are beating up the competition," said David Heupel, manager of the Thrivent Large-Cap Growth Fund, which does not own Best Buy shares. "If that continues, they can overcome a slow economic environment."

Yet the slowdown in consumer spending has not spared the retailer. The company attributed its fourth-quarter same-store sales decline to lower traffic in its stores, partially offset by an increase in the average selling price, as consumers bought more big-ticket items such as video game consoles and flat-panel TVs.

Best Buy also announced that it reclassified $417 million in auction-rate securities as long-term holdings as a result of "persistent failed auctions" of the securities. The company said it is evaluating the worth of these securities, the vast majority of which are collateralized by student loans. It expects to conclude that analysis no later than April 30.

For the quarter ended March 1, Best Buy reported net income of $737 million, or $1.71 per share, compared with $763 million, or $1.55 a share, a year earlier. Revenue increased 4 percent, to $13.4 billion.

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Though better than expected, the fourth-quarter results left some analysts questioning whether Anderson is being overly optimistic. "With the economy the way it is now, it's hard to convince investors that a 1 to 3 percent [same-store sales] gain is a solid assumption," said Stacey Widlitz, a retail analyst at Pali Research.

Investors had a tepid reaction Wednesday to Best Buy's forecast. Shares rose more than 4 percent in early trading but closed the day up just 1 percent, at $43.94 a share. The retailer's stock is down 16 percent since December.

Yet Best Buy has a history of beating expectations in difficult economic times and occasionally underperforming in good ones. In 2001, during the last recession, the company's revenue surged 28 percent by focusing on the hot products at the time -- digital cameras, MP3 players and mobile phones. Same-store sales that year rose 1.9 percent.

Anderson said Wednesday that the retailer still hasn't benefited fully from a store concept, dubbed "customer centricity," that it began to roll out three years ago. The strategy involved targeting customers by using more personalized service, based on their demographic characteristics.

Now, with the economy softening, Anderson has asked all Best Buy stores to intensify that effort by enlisting more employees and by allowing stores to introduce products that fit particular neighborhoods. "We're using the challenge of the moment to put this strategy over the top," Anderson said.

Chris Serres • 612-673-4308

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Mike Chacich of Apple Valley tried the "Guitar Hero" display Wednesday at his local Best Buy store, which has expanded its video game area. Best Buy is focusing on its "customer centricity" concept.
Mike Chacich of Apple Valley tried the “Guitar Hero” display Wednesday at his local Best Buy store, which has expanded its video game area. Best Buy is focusing on its “customer centricity” concept. (Star Tribune/The Minnesota Star Tribune)
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about the writer

Chris Serres

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Chris Serres is a staff writer for the Star Tribune who covers social services.

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