Best Buy Discusses Flat Panel TVs and Home Theater

| About: Best Buy (BBY)

Best Buy reported earnings results Wednesday. After opening lower, the stock traded up significantly during the trading day. A significant driver of Best Buy's sales results is the flat panel TV upgrade cycle. Not surprisingly, Best Buy's conference call with analysts was filled with discussion of flat panel TVs and home theater systems. Here are some key comments from CEO Brad Anderson and Senior VP Merchandising Mike Vitelli about Best Buy's approach to selling home theater and flat panel TVs; they are a must-read for anyone investing in flat panel or home theater stocks, such as Corning (NYSE:GLW), Digital Theater Systems (NASDAQ:DTSI), AU Optronics (NYSE:AUO), and LG Phillips LCD (NYSE:LPL):

Mike Vitelli:

...Consumers have never spent this kind of money on a TV before, and it is a big deal. When you make an investment like this, you want it to be great. Moreover, you need all the pieces of the puzzle to have a great experience and therefore, a fully satisfied customer. That is why you see us trying to educate the customer through our HD Done Right pledge. HD Done Right gives customers financial incentives to do what is actually in their best interest. It encourages them to get what they really need to get that home theater experience that they always wanted.

It works like this. Come to Best Buy and purchase an HD TV that is 37 inches or larger, let us install it for you and upgrade your signal to high definition, and right now, we will give you up to $400 off the price of your TV. We believe this strategy will materially reduce returns and increase the needed attachments of accessories and subscription service centers that are needed. More importantly, it will deliver that experience that the customer was looking for, so it is a win for everybody.

So to wrap up, our TV business is off to a great start this year. It is on track with our plans. We have not seen any decline in the consumer’s interest in this important category and with supplies up, we continue to expect average selling prices to drop between 25% and 30%, year over year on identical SKUs, and that is good both for consumers and for retailers, because as prices drop, more customers enter the high definition TV space, and we see and expect to continue to see customers to trade up to the biggest screen size and best technology that they can afford....

And later on in the question and answer session, the company discussed the profitability of its flat panel business. Remember when you read this that Best Buy's most profitable product line is probably warranties:

Gregory Melich - Morgan Stanley

I just have a question on TVs, but probably about 10 parts. I will try and cut it down to two parts. Flat panels were still up triple digits, which suggests that the rest of the store was probably down in terms of comps. Did that have any impact on margins?

The second part of that question would be, what impact does it have on margins when you layer in attachments and warranties and how that is trended?

Mike Vitelli

Gregory, to answer your question, the margins overall in flat panel have been positive for us. The basket has been a positive thing for us, as you can see the high definition advantage pledge that we are offering is in a sense trying to encourage that in a positive way with our customers. So when I look at the second quarter, the issues that impacted the margin were more mix changes than they were the category of television.

Gregory Melich - Morgan Stanley

Okay, so televisions net net, were still -- they did not hurt gross margins, and they probably helped?

Mike Vitelli


Gregory Melich - Morgan Stanley

If you layer on warranties, did they increase as you are selling more of these higher priced items? Is that helping?

Mike Vitelli

Clearly, as you sell higher priced items and new technologies, customers look at the warranties as a positive thing when they put the basket together.

Brad Anderson

But as a response to your earlier question, we are looking at the whole transaction when we evaluate it, so we are not just looking at a piece of the transaction.

Gregory Melich - Morgan Stanley

Okay, so the answer to the margin question initially is looking at the attachments included.

Brad Anderson

Yes. We are looking at the end-to-end solution for the customer and we look at the basket of that entire transaction to provide not only benefits to the customer but also that benefit our operating model.

The full Best Buy conference call transcript is here. You can also view other recent conference call transcripts, and sign up to receive them by email as soon as they are published.

Jim Cramer, by the way, made a great call on Best Buy's stock a few days before results were announced. More research on flat panel stocks here.

Full disclosure: the author is long DTSI at the time of writing.