Best Buy's shift to must-buy

Consumers' hunger for laptops and flat-panel televisions helped to lift profit at Best Buy Co. Inc. by nearly 37 percent in the fourth quarter, even as prices and profit margins on those bread-and-butter products continued to fall.

The Richfield-based retailer said it was the 29th straight quarter of double-digit sales growth for notebook computers. Television sales increased in the high single digits during the period.

"Staying connected has become a non-negotiable for millions of people," Best Buy CEO Brian Dunn said in a Thursday morning call with analysts.

Technology has become "such integral elements in people's lives," he added, "that they have little or no tolerance for any kind of disruption if things aren't working the way they should."

Best Buy posted better-than-expected profit of $779 million, or $1.82 a share, for the quarter ended Feb. 27, a lift from $570 million, or $1.35 a share, a year ago. Revenue increased 12 percent to $16.6 billion.

The stock rose almost 4 percent during Thursday trading to $42.66.

Driven by holiday shopping, same-store sales were up 7 percent. Last year at this time, Best Buy's sales had declined 4.9 percent from the prior year.

"They're executing on all cylinders from what we can tell from the outside," said Love Goel, CEO of GVG Capital Group, a retail private equity firm. Goel highlighted the retailer's gains in market share, its continued expansion to international markets and increasing web sales.

But a big key, he said, is Best Buy's recognition that the way Americans work is changing.

"Ten, 15 or 20 years ago, the majority of us worked at major corporations or in government," he said. "Now, more than 50 percent of Americans work in small businesses or at home. These people need computers, mobile phones and lots of other stuff for their home office. That whole phenomenon of a shift to small and home-based business has driven huge sales for them. That's a theme likely to play out over the next decade."

In the past year, with Circuit City stores closed, Best Buy said it increased U.S. market share by 2.4 percentage points, more than double the 1 percentage point gain it typically has seen in the past decade. Chief Marketing Officer Barry Judge estimated that Best Buy has a "mid-20s" share of the $165 billion U.S. market for consumer electronics.

But market share, by traditional measures, is changing. And Best Buy's current refrain is about "moving this business into a bigger world," Dunn reiterated in an interview.

As Internet-ready televisions become more commonplace, Best Buy will begin moving in a world that includes relationships not only with multitudes of mobile service providers, but direct TV or cable providers as well. The playground is getting bigger, and the TV is about to become the "telecommunications hub of the home," Dunn said.

By late summer or early fall, Dunn predicted that stores will carry very few TVs over 42 inches that are not Internet-enabled.

"That allows us the opportunity to help customers make selections about what they want their television connected to, what broadband service they want, what suite of video or music or photo services they want, and on and on," he said. What once was just an idea -- that your laptop and TV could talk to each other "is going to manifest this year in a material way."

After two years working out the kinks, Best Buy will invest heavily in expanding its smaller, mall-based Best Buy Mobile stores. The company plans to open 75 to 100 of freestanding Best Buy Mobile stores this year, about a 25 percent increase over previous years.

The stores are drawing more women shoppers and not cannibalizing sales from traditional stores, even when located under the same roof.

Best Buy will also build 50 to 55 big box stores, but the footprint may be half the size of its largest stores.

For the year, Best Buy's revenue was up 10 percent, to $49.7 billion. Online sales jumped 20 percent, contributing about $2 billion. Earnings increased 35 percent to $1.4 billion, or $3.10 per share.

Looking ahead, the company projects earnings per share to be in the range of $3.45 to $3.60 on total sales of $52 billion to $53 billion, an increase of 5 to 7 percent. Same-store sales are expected to increase 1 to 3 percent.