Best Buy Execs Comment on China Retail Strategy

From Best Buy's (BBY) fiscal Q1 2008 earnings conference call earlier today:

Robert A. Willett - Chief Executive Officer Best Buy International

We are also making good progress in China. Our first Best Buy store in China is projected to finish the year with revenue that ranks it amongst our top stores globally. That’s a pretty good start for a first year of business.

Our Five Star stores are above plan in revenue. We’ve seen some pressure on the gross profit rate yet strong growth in the top line and in gross profit dollars. Unlike our competitors, we are not putting all our focus on adding real estate. Rather, we are focusing on growing both comparable store sales and operating profits at our Five Star stores through the lens of customer centricity.

We are also having some initial success in evolving the margin structure. Secondarily, we continue to pursue a realistic number of new store openings as a part of a controlled growth strategy, which is intentionally measured.

We believe that this pace of growth is prudent, disciplined and sustainable. Moreover, we remain confident that we can boost the profitability of this business over time as we are doing in Canada.

Vivian Ma - Analyst, CIBC

Good morning. Just a couple of questions; you mentioned that in the third quarter, you are going to be lapping the China acquisition and that should alleviate some of the pressures in the gross margin. I’m just wondering about the gross margin trends within China itself. Has it been stable? Has it been declining? What are some of the factors there?

Robert A. Willett - Chief Executive Officer Best Buy International

We’re seeing first of all an improvement in the operating model. I do want to point out though that it’s definitively slow because you are moving from a situation where the vendor controls the staff, the space and basically the retailer is a landlord. In our Best Buy store in Shanghai, we’ve changed that model completely but in Five Star, we’re doing it very slowly. We’re also adding our product ranges from our global sourcing office in China, so we’re starting to see improvements. In fact, the whole purpose of being here for the next few days is to actually look at what we’re doing around that area.

But it’s pretty stable. It’s pretty steady but it is moving and it’s moving in the right direction. But we’re now at a point where we do have to make some fundamental changes in the operating model.

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Comments

[john gaats]

It shows some learning curve for BBY in China. Long term vise, BBY will be a lot less attractive without a good Chinese strategy. So far, it is on the right path. Just not on a straght line.