Best Buy Co., Inc. (BBY)

F2Q2011 Earnings Call Transcript

September 14, 2010 10:00 am ET

Executives

Bill Seymour – VP, IR

Brian Dunn – CEO

Jim Muehlbauer – EVP, Finance and CFO

Mike Vitelli – EVP, President-Americas

Analysts

David Strasser – Janney Montgomery Scott

Gregory Melich – ISI

Colin McGranahan – Bernstein

Jack Murphy – William Blair

Michael Lasser – Barclays Capital

Alan Rifkin – Bank of America/Merrill Lynch

Brian Nagel – Oppenheimer

Peter Keith – JMP Securities

Presentation

Operator

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Welcome to Best Buy’s conference call for the second quarter of fiscal 2011. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded for playback, and will be available by 12 P.M. Eastern Time today.

I would now like to turn the conference call over to Bill Seymour, Vice President of Investor Relations. Please go ahead, sir.

Bill Seymour

Thank you, Brandy. Good morning, everyone, and thank you for participating in our fiscal 2011 Second Quarter Earnings Conference Call.

We have two speakers for you today. First, Brian Dunn, our CEO, will share his thoughts on the second quarter and the rest of the year. Second, Jim Muehlbauer, our CFO, will recap the financial performance and then provide you with our perspective as to how the balance of the year will play out. After our prepared remarks, I anticipate we will have ample time for your questions.

Before I pass the call over to Brian, I’d like to take care of a few housekeeping items. First, we would like to request that callers limit themselves to a single question during the Q&A portion of the call so we can get to as many questions as possible during the next hour.

Second, I’d like to remind you that comments made by me or by others representing Best Buy may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management’s expectations.

Third, as usual, the media are participating in this call in a listen-only mode.

Lastly I’d like to remind you that our fiscal 2010 first quarter results last year included restructuring charges, which impacted our net earnings by $25 million or $0.06 per diluted share.

Any year-to-date comparisons versus last year made during the balance of our discussion on this morning’s call will exclude these charges. That means the comparisons we make will be on an adjusted non-GAAP basis.

For a comprehensive GAAP to non-GAAP reconciliation of our reported to adjusted results, please refer to the supplemental schedule on page 11 of this morning’s news release.

With that I’d like to turn the call over to Brian Dunn.

Brian Dunn

Good morning, everyone, and thanks for joining us on our second quarter earnings conference call. We’re halfway through the year and I’m pleased with our performance. And I want to thank the men and women of Best Buy for their tremendous efforts in navigating a challenging environment and still delivering good results.

We have talked for a while about our Connected World strategy and the central role that plays in our efforts to build shareholder value by driving profitable growth.

Best Buy Mobile is the tip of that spear, the single biggest driver of profit growth for us this year and the key to raising our margin guidance for the year.

Best Buy Mobile is not the only plank in our Connected World platform, and I’ll talk a bit about the other ways we’re beginning to bring the Connected World to our customers across all our categories, but first a few highlights from the second quarter.

Despite weaker industry sales than we expected, EPS grew 62% in the quarter. We had gross margins of 25.7%, up 130 basis points, driven in particular by the continued momentum of Best Buy Mobile. During the quarter, we bought back $600 million of stock, which brought our first half of the year repurchased total to more than $700 million.

We continue to see buybacks and dividends as a good way to improve returns for shareholders and intend to utilize this lever in the coming quarters as we go profitable.

Now let’s drill down into our U.S. business for a minute. We estimate that our overall market share was down slightly in the second quarter, 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. We believe, however, that we’ll see overall share gains in the second half of the year.

Last quarter I talked about consumer spending being episodic, in the fact that customers are operating on cues from the broader environment. This still holds true. 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 line up of products coming across the board reinforces our confidence. TV comps were down in the quarter. We had a difficult compare versus last year, and the overall industry was down.

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, an encouraging sign and a good leading indicator considering the innovations in home theater we see coming in the quarters ahead.

Computing had a positive overall comp for the quarter. Tablets in particular were very strong for us. Best Buy Mobile continued its success, again posting the highest comp among all of our product categories.

We’re excited about what we’re seeing here because it confirms that Best Buy Mobile is a powerful value proposition for the customer combining world class impartial service and unparallel choice and carrier’s plans and the best brands of smartphones.

To top it off, our Walk Out Working promise puts it all together for customers and make sure that their smartphone is ready to go when they leave the store.

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