BBY: Conference Call Transcripts Tell the Tale of Two Consumer Electronics Retailers
The headlines told one story today while the tape told another. The headlines said “Best Buy Profit Up While Circuit City Struggles“. Meanwhile Circuit City lost only a third of a percent for the day while Best Buy got trimmed by 2.5%. It would be entirely reasonable for investors to be confused, so we decided to turn to the original releases and the conference call transcripts to get the whole story.
To be clear, Best Buy had the best performance, with same store sales up 5.9% during the quarter even after allowing for the quarter’s extra week. Circuit City stores open in both periods sold less this year than last. Furthermore, while both chains saw their gross profit margins trimmed by nearly a percentage point, Best Buy’s were better to begin with. And Best Buy is bigger, selling more during the quarter than Circuit City managed for the whole fiscal year. But none of this helps to explain the stock movements. Though both calls started with the customary CEO homily, there was a stark difference in tone:
We view the world today as a large, open set of customer problems, wants, needs and desires, not all of which are confined to consumer electronics. So our business, broadly defined, is about meeting the needs and wants of customers. We believe that our current assets give us a better shot at solving customer problems than we’ve ever had before.
(Excerpt from the full BBY conference call transcript)
This rather broad and lofty goal contrasted with:
For the year overall, we did not give up our customers to our competition. We steadily increased our consumer electronics market share compared with last year, according to Trackline Data. We reached $1 billion in web originated sales, growing more than 50% for the year while making structural changes to become a true multichannel retailer. During the second half of the year, we successfully launched our FireDog brand, covering both PC services and home theater installation, and grew our services revenue by nearly 80% for the year. We opened 35 stores and built a pipeline for between 60 and 65 store openings for fiscal year ‘08. We freed up cash by reducing our domestic net-owned inventory by $88 million and we returned approximately $250 billion to our shareholders through stock repurchases and increasing our dividend.
(Excerpt from the full CC conference call transcript)
Could it be as easy as investors worrying Best Buy is getting too cocky? Circuit City recognized its shortcomings and talked nuts and bolts. Best Buy showed all too much recognition of its success, and talked pie in the sky. Furthermore, it looks like the Best Buy’s customer-centricity isn’t expected to do much for market share:
Total revenue is expected to grow 9% to $39 billion, including a 3% to 5% comp sales gain for the year.
(Excerpt from the full BBY conference call transcript)
So for the full year, we expect net sales growth of 5% to 8% driven by domestic comparable store sales growth of 3% to 5%
(Excerpt from the full CC conference call transcript)
With both expecting the same growth from existing stores, we’ll take the one focused on nuts-and-bolts margin improvement over the one focused on pie-in-the-sky customer-centricity any day. Particularly when management can back it up:
Dan Binder – Buckingham Research
I was wondering if you could just give us more color on what kind of labor model changes you’re doing and what gives you the confidence that you can do that in the next few quarters?
Danny Clark
First of all, I talked about the 50 store pilot group in my comments where we went in last year and have done some standard operating procedure changes, new SOPs in those stores, a new operating model in those stores all the way from how we receive trucks to how merchandise goes out on the floor to how associates interact with customers. We ran that pilot for over six months because we wanted to make sure that we had sustainable results. We’ve had sustainable improvements in both conversion, customer service levels in those stores and associate engagement. So there’s been three very positive signals from those stores over time and across 50 stores in different markets around the country. That work will be scaling in the first half of this year so that will be in place in all of our locations.
(Excerpt from the full CC conference call transcript)
By contrast, rather than backing up their talk, Best Buy seems to be backing away:
Matt Fassler – Goldman Sachs
I just want to dig a little bit deeper into your capital allocation discussion. You talked about opportunistic buybacks. How do you think about those opportunities in terms of stock price, times of year and outlook? If you could also give us some color related to that as to the amount of cash that you like to keep on the balance sheet, just from an operating perspective.
Darren Jackson So maybe a different way of asking that question, we didn’t buy a lot of stock back in the fourth quarter.
(Excerpt from the full BBY conference call transcript)
“Opportunistic” buybacks are those that take advantage of a low stock price. By not buying back shares, Best Buy is implicitly saying their stock price is higher than they think it should be. One begins to understand why the tape told a different story from the headlines.
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