Tuesday, June 19, 2007

Best Buy's Net Income Drops 18%

From the AP

Profit for the quarter ended June 2 dropped to $192 million, or 39 cents per share, from $234 million, or 47 cents per share, in the same period a year ago.

Revenue rose 14 percent to $7.93 billion, from $6.96 billion last year.

Analysts polled by Thomson Financial expected a profit of 49 cents on revenue of $7.85 billion.

Same-store sales, or sales in stores open at least 14 months, grew 3 percent during the quarter.

Increasing revenue + decreasing net income = margin compression. This means the company is making less money on what it sells. Compressing margins means the company has less room for internal error. It also means the company has work to do because from the company's perspective it is selling the wrong mix of products.

This is not a conscious effort from consumers; they are not going into the store and saying to themselves, "I want to buy products that make Best Buy less money." What's happening is consumer's tastes and preferences are changing to items that make the company less money. Now the ball is in Best Buy's court to find a mix of products that increases their margins.

The reason for following Best Buy is simple: they are the largest consumer electronics store by a large margin. Their market capitalization is $22.9 billion and their next largest competitor is Gamestop at $6.2 billion. In other words, BBY dominates the industry, so their overall fortunes give a strong indication of what may be happening in this industry. It also gives us an idea of what may be happening with the consumer.