David Gardner selected Best Buy
Our Fool by Numbers roundup portrays a solid growth story, with double-digit increases to the top and bottom lines. When you consider some of the high-profile gadgets expected out in the coming weeks and months, including Sony's
New game consoles and music players are nice, but look no further than the company's latest earnings conference call to see what management is really excited about. Today, Fool on Call will dive into Best Buy's most recent conference call, focusing on three areas of growth:
- Customer centricity
- Premium home theater
- International expansion
Bringing the big screen to the Joneses
It is impossible to listen in on Best Buy's latest quarterly earnings conference call and not see the importance of home theater. Couple it with another concept you'll hear frequently, "customer centricity," and you get the sense that Best Buy has fully bought into the two as critical areas for growth.
By the way, the customer-centric model isn't limited to home theater. Best Buy is also making a strong push into the professional segment by expanding its Best Buy for Business initiative, which is already in 120 stores and counting.
I think of "customer centricity" as the idea that by helping your customer, you help yourself. Simple enough. But to really get a sense of how Best Buy achieves this end, the best example is in home theater.
President and COO Brian Dunn had this to say on the subject: "Home theater is the new heart for the American home." Gosh, it's rather depressing if it is. Personally, I can't remember the last time I flipped on my TV to watch television programming. But Best Buy is banking heavily that I am in the minority. I'm guessing they're right.
Customer centricity comes into play when attempting to deliver "the same exact home theater experience at home" that customers can find in Best Buy stores. The key here, then, is in service and installation. To accomplish this, in the second quarter alone, the company hired an additional 300 installers, bringing the total to 1,900. The goal is to make the initial flat-panel HDTV sale just that, a starting point. Best Buy then wants to follow up with add-on warranties, installation service, and accessories . all of which carry greater profitability than the slim margins on TVs themselves.
Comparable same-store sales for the period were a very stout 9.3%, due in large part to flat-panel TV sales. As the price of these units continues to drop, sales should remain strong, and Best Buy is hoping to be in a good position to capitalize with its service and accessories strategy.
Premium HD, premium profits
How bullish is Best Buy on the home theater business? Head of Merchandising Mike Vitelli states, "We're very bullish on the flat-panel home theater space, and we're confident that we're making the right investments here." Beyond what Best Buy stores are doing -- increasing product knowledge for employees, revamping in-store displays, adding installers, etc. -- the parent company is investing in this segment in another way, targeting the premium end of the market.
Pacific Sales is one of the concepts being used to target high-end home improvements, the other being Magnolia Audio Video. The latter saw comps growth of 2.3%, which seems paltry in comparison to the near double-digit level achieved by Best Buy. But we want to be careful not to overlook how Magnolia and Best Buy are being integrated.
Presently, 162 Best Buy stores contain Magnolia home theater experiences -- essentially a store within a store. This gives Best Buy the ability to carry more premium product lines, and at the same time employ more highly trained professionals, which are expected to combine to bring about an increase in the aforementioned higher-margin sales. Executive leadership is so excited about the customer response to this concept that it is planning to nearly double this figure over the next two quarters.
Finally, let's briefly turn our attention to Dunn's remarks on developing an international strategy. He stated, "We see tremendous opportunity, but you'll see us go slowly." A slower, more intentional, and more manageable international growth strategy is favored, since Best Buy wants to take the time to "develop local talent wherever the customer meets the brand."
Another reason for caution: The company recognizes that this is a "new" opportunity for it, and as of yet, it lacks expertise in this field. One step toward increasing the company's repertoire on global markets was accomplished by adding two new outside members to Best Buy's board during the quarter, both of whom bring significant experience in international expansion to the table.
With stores already in Canada, and a footprint forming in China, Best Buy is already taking concrete steps toward becoming an international enterprise. Expect this trend to continue methodically in the quarters ahead.
Time to plug in?
One word comes to mind after listening in on the company's conference call: "machine." I use this word in its best sense -- Best Buy's operations are so efficient and effective that if it simply continued rolling out one more store after another, it seems hard to see how a long-term investor could lose. This was the idea Sam Walton had when he found a winning recipe in Wal-Mart
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