Best Buy Sees Bright Future
(04/02/98; 4:22 p.m. EST)
By Mark Harrington, Computer Retail Week
Calling PCs "the biggest operating income contributor to the corporation" in fiscal 1998, Best Buy guided Wall Street Thursday to another year of stellar gains, saying it has largely insulated itself from the PC pitfalls that have dogged its rivals.
In fiscal 1997, officials said, PCs were the "biggest operating loss" category for the company. "This year [fiscal 1998], that completely reversed itself," said Allen Lenzmeier, vice president and chief financial officer.
"Let's remember where they were last year," said Ursula Moran, analyst at Sanford Bernstein. "They lost their shirts in PCs last year. Their performance now looks wonderful in contrast to that. It is aided by the comparison to a period that was very poor."
Meanwhile, the company said it will roll out a multibranded build-to-order (BTO) kiosk in a 10- to 12-store pilot nationwide. The company said it will not limit itself to any single brand BTO program, clearly a divergent path from those of all BTO suppliers to date.
I can see DELL being in this kind of program. Wouldn't take much to put kiosks out for internet shopping Greg
It was unclear which of Best Buy's major PC suppliers -- Compaq, IBM, Hewlett-Packard, and Packard Bell/NEC -- was participating. The retailer said it expects to roll out the pilot "randomly" throughout the country in the next 90 days, and will use the strategy to expand sales of higher-priced systems.
Word of the PC sector's contribution to Best Buy's operating profit comes as the company downplayed the impact of lower average selling prices (ASP) on its bottom line, even as its rivals fumbled to explain a more dire ASP impact. (CompUSA cited it Wednesday in reporting a relatively flat third quarter.)
But Richard Schulze, Best Buy's chairman and CEO, told analysts improved inventory controls, higher turns, vendor relationships, and selling ability have helped it largely negate the impact of lower ASPs. In addition, he said, Best Buy hasn't seen the level of price decline the industry as a whole is experiencing, putting Best Buy's average system selling price at around $1,100.
Noting that competing retailers have reported average selling prices declining in the 8 percent to 10 percent range, Schulze said, "Our plan is to do better than that." He said the company will see only "low-single-digit to mid-single-digit declines." This is based on the company's ability to sell higher-priced, feature-packed PC systems, he added.
Lenzmeier said Best Buy simply prepared earlier for the impact of sub-$1,000 PCs on the company's business. "It had a bigger impact and at an earlier time than others," he said. "So we'll annualize it earlier than most [competitors]."
Schulze said the company expects to report comp-store sales during fiscal 1999 averaging from 4 percent to 5 percent, with stronger expectations for the first half because of current strong sales levels and easier comparisons. Comp-store sales in its first quarter could hit 10 percent, Lenzmeier said.
The rollout of so-called Concept IV merchandising enhancements in Best Buy stores during the first and third fiscal quarters will focus primarily on "improving the overall gross margin on products we sell," Schulze said. Five Concept IV stores are planned for the first quarter, and the balance will open in the third.
For the short term, Best Buy isn't expecting Windows 98 to be a major sales contributor when it's introduced June 25. "There's less of a reason to replace the overall system" in comparison to Windows 95, said Brad Anderson, president and chief operating officer. "It's not perceived Windows 98 will have anywhere near the impact that Windows 95 had."
Company officials on a conference call Thursday morning pointed to improved inventory controls, lower debt, higher turns, and more efficiencies in reporting earnings for the year ended Feb. 28 -- $94.4 million, compared with $1.7 million last year. Sales of $8.3 billion were 8 percent higher than last year's $7.7 billion. Earnings for the fourth quarter were $64 million, compared with $8.5 million in the previous year. Comp-store sales were up 2 percent for the year and 16.9 percent for the quarter.
Dick Schulze, chairman and CEO, said the company is still only in the first phase of many operating-improvements initiatives, and told analysts to expect continued improvements.
Most notable among the improvements was the company's PC business. Lenzmeier told analysts the PC business went from being the company's least profitable sector on an operating basis to the one producing highest operating profit. >>
You shorts are going to suffer long and hard.
Greg
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