Randomly Noted

How companies go about handling their foreign exchange exposure can often play a meaningful role in their earnings reports. The latest example of this was with Best Buy earlier today.

The huge electronics retailer reported that its sales were up 7% for the quarter.  A chunk came from new store openings. But also a decent piece came from favorable foreign exchange in its international operations. Including favorable forex translations, international sales were up 11%. Factor out the forex element, and sales were up but 1.4%.

Now shift over to costs. Selling, general and administratives expenses (SG&A) came in at 23% of sales for the quarter, a whopping 1.1 percentage point increase. Part of that was due to new store openings and some other investments. but as the company said: “Also contributing to SG&A dollar growth was the impact of fluctuations in foreign currency exchange rates.”

So, it looks like part of the business got it right, while others didn’t…

This blogger is visiting family in Virginia Beach this week and was doing some last-minute holiday shopping today. I walked into a very crowded Best Buy and spoke with a floor clerk about what people are buying – the answer: two items in particular. Then when at the checkout, I asked the cashier the same question. And I got the same two-item answer. Now granted, this is one store and it’s one town. But it was the reasoning for these purchases that each employee offered that makes sense it could be a wider trend. The items were the iPod and the iPod Touch. You are “cool” if you have either one and the iPod in particular starts at a relatively low price point. The iPod shuffle starts at $59. The iPod Touch starts around $199 and is all about not only a big audio and video library, but WiFi access that lets you take advantage of not only the Internet but the Apple apps that make the iPhone so popular. So, you get those bells and whistles with no monthly cell-phone fee (but you need to have WiFi access…) Will be interesting to see if the Virginia Beach trend is seen around the country.

Anecdotally, it appears Americans are out shopping today, grabbing flat-screen TVs and other electronic items they probably don’t need more of. Early evidence suggests the likes of Wal-Mart, Best Buy and Target are faring well this Black Friday while higher-end stores are seeing lackluster shopper interest. The prevailing consumer psychology seems to be: Grab discounted electronic goods now before already-slim inventories evaporate – then worry about the smaller gifts and stocking stuffers in the days and weeks before Christmas. Consumers seem to have digested news reports that retailers, hungry for profit margins, avoided stocking up before the holidays because they didn’t want to get stuck with excess inventory they’d ultimately have to offer at massive, profit-eroding discounts. Given this reality, it makes all the sense in the world to buy splashy, big-ticket presents early – if, that is, there’s a compelling reason to have yet another television. Which isn’t at all evident to me. One family interviewed by my DJN colleagues bought three TVs this morning, and a disc player. A family needs no more than one television in robust economic times  much less in an era of 10.2% unemployment.

When Circuit City closed its doors earlier this year, the conventional thinking was that rival Best Buy would be the big beneficiary. It hasn’t played out that way.

Best Buy reported earnings today that showed a modest increase in market share (about a 3% pickup) that came with a cost – competition from others looking to get Circuit City’s customers forced Best Buy to cut prices, putting pressure on profit margins.

The question analysts on Best Buy’s conference call wanted answered was how long did the company think this margin compression would go on. There were no firm answers.

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