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Best Buy Co., Inc. F1Q11 (Qtr End 05/29/10) Earnings Call Transcript

Best Buy Co., Inc. F1Q11 (Qtr End 05/29/10) Earnings Call Transcript

Best Buy Co., Inc. (BBY)

F1Q11 (Qtr End 05/29/10) Earnings Call Transcript

June 15, 2010 10:00 a.m. ET

Executives

Bill Seymour - VP, IR

Brian Dunn - CEO

Jim Muehlbauer - CFO

Mike Vitelli - EVP, President-Americas

Shari Ballard - EVP, President-Americas

Analysts

Gary Balter - Credit Suisse

Dan Binder - Jefferies

David Schick - Stifel Nicolaus

Mike Baker - Deutsche Bank

Scot Ciccarelli - RBC Capital Markets

Chris Horvers - JPMorgan

Brad Thomas - KeyBanc Capital Markets

Alan Rifkin - Bank of America

Matthew Fassler - Goldman Sachs

Mitch Kaiser - Piper Jaffray

Presentation

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Operator

Welcome to Best Buy's conference call for first quarter fiscal 2011. (Operator instructions)

I would now like to turn the conference over to Bill Seymour, Vice President of Investor Relations.

Bill Seymour

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Good morning, everyone, and thank you for participating in our fiscal 2011 first quarter earnings conference call. We have two speakers for you today. First, Brian Dunn, our CEO, will share his thoughts on the first quarter and give you a quick update on what we are seeing with the consumer and our plans for the rest of the year. Second, Jim Muehlbauer, our CFO, will recap the financial performance and then provide you with our perspective to how the balance of the year will play out.

And finally, after our prepared remarks, I anticipate we will have ample time for your questions. As usual, we have a broad management group here in the room with me today to answer your questions after we make our formal remarks.

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 that 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.

And 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. 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 10 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 first quarter earnings conference call. My comments this morning will center on our first quarter performance, what we are seeing from the consumer, the progress we've made against our strategic objectives and our focus for the rest of the year.

First things first. While there were some positive signs in our results, this quarter's earnings were below our expectations, and that's something I and everyone in this management team take very seriously.

There are two primary drivers behind these results. First, we experienced some variability in customer traffic in the U.S. over the course of the last three months, which resulted in a slightly lower comp than we were expecting. Second, we planned for higher SG&A during Q1 to accelerate some of the capabilities to sell more robust solutions for customers; however, our SG&A spend still came in higher than we had targeted for the quarter.

On the consumer front, we experienced some volatility in customer traffic week-to-week and month-to-month. Consumer spending has been episodic and it appears that our customers are operating on cues from the broader environment. But while spending has clearly rallied from low levels of 2009, our data paints a picture of the consumer coming out to spend and spend well during important events, but taking pauses in between. We can adapt to this environment and maximize the customer opportunity as our spending appeared to run parallel to the economic recovery.

The SG&A increase year-over-year is largely a function of timing, but it also is a function of investments we are making for the future. This is part of our plan to improve the profitability of our business model beginning this year. However, this work requires some initial SG&A investments to achieve higher ongoing gross profit margins to better performance in existing businesses and extensions into new profit pools.

All that said, we remain committed to delivering our SG&A budget for this fiscal year and expanding our operating margins. Jim will provide more color on SG&A spending and the investments we're making in just a few moments.

As I mentioned earlier, there are several positive indicators in our first quarter results. Our gross profit rate performance on a year-over-year basis was encouraging and sets us up nicely for achieving our operating margin expansion targets this year.

We continue to grow our business in Q1 with our international segment growing comparable store sales faster than the domestic segment. That tells us that customers continue to respond positively to the wide range of products, services and the knowledgeable assistance our employees provide, all of which are central to the differentiation of the Best Buy experience.

These results speak to the benefits of an international portfolio and what it brings to the company, as we made significant traction in our strategic investments outside of the U.S. In China, our Five Star business continued to shine as it delivered a low single-digit operating profit margin on a comparable store sales gain of nearly 35%.

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