Best Buy's market share rises

It's not exactly a slugfest, but the grab for now-defunct Circuit City's customers is on.

In its first quarterly reporting period since Circuit City closed its doors March 8, Richfield-based Best Buy said Tuesday that it grew market share 2 percentage points in the first quarter, driven by strong gains in notebook computers, digital cameras and accessories, and home theaters.

Though the market-share gain may seem modest, executives touted it as an indication that when the economy picks up, so will the company's bottom line.

"People are careful about where they want to spend money," President and Chief Operating Officer Brian Dunn, said. "You've got to be there dollar for dollar, item for item. But it's more than low price. It's price plus service plus experience, Reward Zone, all those things that say, 'Hey, you care about me, so I'm going to do business with you.'"

For now, however, weak consumer demand continues to drive down profits, with Best Buy seeing earnings dip 15 percent for the quarter that ended May 30. The company also remained cautious for the year.

Dunn, who takes over as CEO June 24 when Brad Anderson retires, said he's convinced that the 'round-the-clock "connectivity" will be essential to consumers into the foreseeable future. One of his main priorities is to focus the company's efforts on providing consumers with products and services to keep them connected on everything from digital downloads through Napster to services that let customers leave the store with their smart phones working.

"People need to be connected to their businesses. People want to be connected to the people they love, to their photos, to their music, to all the things they care about," Dunn said.

With Best Buy's biggest rival vanquished, some of the immediate pressure may be off. But Costco, Amazon and Wal-Mart are throwing sharp elbows Best Buy's way in the struggle for Circuit City's customers.

Best Buy, the nation's largest consumer electronics retailer, is taking direct aim. A recent television commercial shows a Best Buy employee talking about a phone call in which she convinced a customer, who was standing in a Wal-Mart store, to buy a TV from Best Buy after she answered his questions. Best Buy also sent out letters to all of Circuit City's credit card customers, making it easy for them to close that account and open a Best Buy credit card, a tack Dunn said has been "very successful, though results are early."

But as long as consumers remain shaky about forking over big bucks for discretionary consumer electronics products, potential gains from Circuit City's exit may come in dribs and drabs rather than a giant onrush.

No stimulus shots

Quarterly earnings were $153 million, or 36 cents a share. That was higher than the 34 cents analysts had forecast, but Best Buy stock took a beating on the news, sliding 7 percent to end the day at $35.84. The company blamed the earnings decline on a $25 million hit it took through layoffs at stores and restructuring of its European division. Without the charges, earnings per share would have been 42 cents a share, the company said.

Dunn noted that year-over-year comparisons were particularly tough, because a year ago the company -- and industry -- got a shot in the arm from government stimulus checks. People weren't buying "more milk and eggs," Dunn said. "They were buying a TV or an item they might not have purchased otherwise."

This year, "staycations" and movie nights at home are boosting sales of televisions, and Best Buy's large selection of mobile phones continues to drive sales. But store traffic has dropped way off, and the average purchase price is flat. So even double-digit gains in smart phones, notebook computers and TVs aren't enough to offset lagging sales of appliances, gaming and movies.

Such sluggish sales might be one reason for the company's caution about the future. Despite the quarter's better results than even internal projections, Q1 makes up just 15 percent of annual sales and the second quarter is historically its most challenging. The company didn't revise its annual earnings guidance of $2.50 to $2.90, a move that concerned some analysts.

But Piper Jaffrey analyst Mitch Kaiser saw it as just another sign that "everybody's being cautious."

"When you net it all out, their competitive advantages are coming in multiple places -- the employees, the customers and their vendors," Kaiser said. "They grew faster than the industry, so they're gaining customers. And with their gross margins, they've increased importance with their vendors."

"We saw people coming in to get a box, and it was a great opportunity for them to see the all-new televisions," said Michael Vitelli, executive vice president of customer operating groups. "Some of them were seeing some products for the first time."