Best Buy prepares for worst case scenario

MINNEAPOLIS Best Buy reported third quarter results this morning that contained several bright spots, but the positive developments were overshadowed by extreme measures the company put in place to reduce expenditures as it braces for a protracted consumer spending slowdown.

On a positive note, total revenue for the quarter ended Nov. 29, increased 16% to $11.5 billion from $9.9 billion and gross margins increased to 24.9% compared to 23.5%. The company said it gained market share, its customer satisfaction scores reached all-time highs, and employee turnover declined 45% from a year earlier. Same-store sales declined 5.3%, but that figure wasn’t surprising given the shift in Thanksgiving this year which challenged comparisons to the prior year when Thanksgiving took place a week earlier.

The company also reported adjusted diluted earnings per share of 35 cents, which reflects a 34% decline from a year earlier. Even so, earnings per share exceeded analysts’ consensus estimate of 25 cents. Earnings per share were 13 cents if a $111 million non-operating impairment charge is included.

On the negative side, expenses as a percent of sales increased to 22.5% from 20% and operating income declined to $274 million from $351 million. Net income declined to $52 million from $228 million.

Although Best Buy’s results were better than expected, the company’s actions suggested a grim outlook for the future. For example, nearly all of its corporate employees are eligible for a voluntary separation package as the company looks to trim corporate expenses. The company also stated that involuntary reductions in corporate staff may be required, depending on the outcome of the voluntary program.

“The historic slowdown in the economy and its effect on our business over the past 90 days have been the most challenging consumer environment our company has ever faced,” said Brad Anderson, Best Buy vice chairman and ceo. “We believe that there has been a dramatic and potentially long-lasting change in consumer behavior as people adjust to the new realities of the marketplace. We also believe that customers will continue to reward those retailers who understand their needs and desires, and offer relevant solutions at fair prices. Yet we clearly recognize that these changes require us to make significant adjustments to our present cost structure.”

In addition to the corporate overhead reduction, Best Buy said it will cut capital expenditures in half next year.