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Friday, September 15, 2006

Analyzing Best Buy's (BBY) Earnings Results

By Yaser Anwar, CSC of Equity Investment Ideas

Best Buy delivered 2Q 06 EPS of $0.47 versus and handily beat the consensus.

The company reiterated 06 guidance of $2.65-$2.80; as in 1Q2006, management did not raise guidance despite beating consensus and its own plan for the quarter.

Domestic same-store sales growth of 3.0% tracked at the low-end of the year’s guided range Business rebounded after a weak June and has held steady into September, thus the gross margin did quite well.

BBY's expense control was great, similar to 1Q 06 propelled the earnings to the upside.

International expenses associated with the closing of standalone Geek Squad stores in Canada and the China Five-Star acquisition reduced EPS by approximately $0.01.

Inventory rose 25%, sharply above the increases in sales and COGS was caused by increase from the buildup of inventory ahead of a 3Q ramp up of BBY's Magnolia store-in-store installations.

Strong demand for flat-panel TVs continues to drive overall sales. Consumer Electronics sales rose 8.9% same-store, driven by continued triple digit gains in flat-panel TVs. Overall TV sales posted a strong double-digit increase.

Entertainment Software rose by +0.8%, despite a strong showing in video gaming, and a low-single-digit comp in DVDs, as music declines weighed on sales.

Strength in notebooks were offset by continued weakness in desktops ,driving a flat comp in Home Office

Appliances fell by 3%, due in part to an intense promotional environment for the category
amidst softening housing-related demand.

Concerns about slowing demand in flat-panel TV, which have pressured both BBY and CC for much of the summer, did not materialize. BBY management noted prices falling at a faster pace than previously forecast – down 25%-30% annualized versus the 15-%25% cited last quarter, but increased unit demand spurred by the lower prices has more than compensated.

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