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Best Buy's holiday lag stokes rebound doubts

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An unexpected, overall drop in U.S. electronics sales hurt Best Buy.

BEBETO MATTHEWS / THE ASSOCIATED PRESS FILES Enlarge Image

An unexpected, overall drop in U.S. electronics sales hurt Best Buy.

MINNEAPOLIS -- Best Buy said Thursday it had disappointing sales during the holiday shopping season, raising concerns about the consumer electronics retailer's ability to turn around its business.

Shares tumbled nearly 29 per cent on the news, showing that investors are increasingly worried about Best Buy's future. Best Buy's stock price had more than quadrupled last year, but had been down seven per cent since the beginning of this year.

The holiday season, which runs from November through December, is a critical period for retailers because it can account for up to 40 per cent of their annual revenue. But this past season was marked by weak consumer spending and heavy sales promotions by retailers.

Best Buy was struggling even before the holiday season because of increased competition from online stores, notably Amazon.com, and discounters such as Walmart. But under CEO Hubert Joly, Best Buy started a turnaround strategy that included revamping merchandise, training employees and cutting costs.

Best Buy went into the holiday season saying it was unafraid of so-called "showrooming," when consumers check out items in stores then purchase them cheaper online. It also said it would match prices of all retailers, including cheaper online rivals, but that policy ultimately led to an unexpected sales decline.

CEO Joly, said there was a lot of competition on price during the holidays and an "intensely promotional" environment. He added Best Buy's business was also hurt by supply constraints for key products, a drop in customer traffic and a disappointing mobile phone market.

Additionally, Joly said there was an overall decline in the consumer electronics market no one was expecting. Indeed, according to research firm NPD Group, consumer electronics sales fell 2.4 per cent to $22.9 billion during the nine-week holiday period.

As a result, total revenue for the nine-week period that ended on Jan. 4 slipped three per cent to $11.45 billion from $11.75 billion. Domestic revenue declined to $9.75 billion from $9.91 billion, while international revenue fell to $1.7 billion from $1.85 billion.

Meanwhile, sales at stores open at least a year -- a key indicator of a retailer's health -- fell 0.8 per cent. But that was better than the 1.4 per cent decline in the prior-year period.

"Best Buy is in a much better position than it was a year ago," said Morningstar analyst R.J. Hottovy. "In my mind, the shares now more accurately reflect very competitive retail environment that will be present in the years to come."

Joly said Best Buy's holiday performance renews the sense of urgency around the company's transformation. He said key priorities heading into fiscal 2015 will include: lowering costs faster and more deeply; growing its online business more quickly; continuing to improve the customer experience; improving marketing efforts and growing its Geek Squad services business.

Joly also said there were no specific plans to close stores but added "we have always said on an ongoing basis that we are looking at the store footprint and we continue to review it."

Shares of the Minneapolis company declined $10.74, or 28.6 per cent, to close at $26.83 after sinking more than 30 per cent earlier.

 

-- The Associated Press

Republished from the Winnipeg Free Press print edition January 17, 2014 B10

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