BUSINESS

Best Buy's profit rises on cost-cutting, legal settlements; online sales help top expectations

08/20/2013 07:43 EDT | Updated 10/20/2013 05:12 EDT
MINNEAPOLIS - Best Buy's net income rose sharply in the second quarter, as the struggling electronics retailer slashed costs and worked to make its website more competitive.

The nation's biggest specialty electronics company beat Wall Street expectations and its shares were up 10.5 per cent at $33.97, marking a two-year high. The shares had jumped more than 16 per cent before the opening bell.

Best Buy Co., which operates in Canada under both the Best Buy and Future Shop banners, has been shuttering underperforming stores and revamping others to offset tough competition from discounters and online retailers.

Under CEO Hubert Joly, the company has instituted a price-matching policy, opened more in-store areas for manufacturers such as Apple and Samsung and invested more to train employees.

Such measures are intended to prevent "showrooming," which is when people go to stores to browse products but then shop online for lower prices.

In a conference call with analysts, Joly noted the various measures Best Buy has taken to make its website more competitive, such as an improved search platform and more product reviews by customers. He said that product reviews are a "powerful tool" for helping attract customers.

"We expect to quadruple the number of reviews we have on our site by year-end," Joly said.

Looking forward, he said the site improvements will continue with measures such as better site navigation and the introduction of new product buying guides in time for the critical holiday season.

In a phone interview with the Associated Press, Joly also expressed the company's commitment to offering the lowest prices.

"Our goal is to be price competitive, it is table stakes," he said.

Notably, online sales rose 10.5 per cent for the period. Meanwhile, revenue in stores open at least a year slipped 0.6 per cent. But that slip is much better than the 3.3 per cent decline last year at this time.

"The sales number is even more impressive considering Best Buy's entirely new website won't launch until 2014, leading me to believe that price matching, and advertising of price matching, is closing the price perception gap with Amazon," wrote Belus Capital Advisors CEO Brian Sozzi.

Joly noted that the company has also made "measurable progress" in declining operating margins.

The company in the U.S. earned $266 million, or 77 cents per share, for the period ended Aug. 3. A year earlier it earned $12 million, or 4 cents per share.

Earnings were 32 cents per share excluding one-time items, much better than the 12 cents per share that analysts had been looking for, according to a poll by FactSet.

Overall revenue fell slightly to $9.3 billion, down from $9.34 billion last year but better than the $9.13 billion that analysts expected.

International operations totalled $1.5 billion, down 2.9 per cent — mostly because of the closure of 15 large-format stores in Canada last year. In addition, comparable-store sales were down 1.8 per cent due to lower demand for consumer electronics and competitive pressure in Canada, partially offset by higher demand in China.

There will be some pressure during the second half of the fiscal year due to price cuts and marketing costs, said Chief Financial Officer Sharon McCollam, as well as a temporary increase in mobile warranty costs and changes in its private label credit-card agreement with Capital One.

However, those costs will be offset by $390 million in annual savings from cost cuts, McCollam said.

Shares rose $4.99, or 16.2 per cent, to $35.72 in premarket trading. The stock has traded between $11.20 and $32.17 over the past 52 weeks.