Best Buy results, same-store sales weak; shares tumble

Tue Nov 20, 2012 11:34am EST

1 of 2. People walk past a Best Buy store in New York in this August 21, 2012, file photo.

Credit: Reuters/Brendan McDermid/Files

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(Reuters) - Best Buy Co Inc (BBY.N) shares fell to their lowest level in a decade on Tuesday as the electronics retailer reported a weaker-than-expected quarterly profit and same-store sales fell for the ninth time in 10 quarters.

The shares tumbled 14 percent to $11.79 in morning trading, highlighting the challenges the company's new chief executive faces in trying to turn around the world's largest consumer electronics chain.

The news came just days before the unofficial start of the holiday shopping season and amid a wide restructuring under CEO Hubert Joly and a looming buyout proposal from founder Richard Schulze.

"The results we are reporting today only strengthen our sense of urgency and purpose," said Joly, who took the helm of Best Buy in September.

The company is a victim of aggressive competition from online and discount rivals and what critics call a failure to adapt to a changing retail environment.

Critics say Best Buy stores are hurting because they have become showrooms for Amazon.com Inc (AMZN.O) and other online retailers, as shoppers check out electronics like high-definition TVs and then buy them elsewhere for less.

"Few people are going to be willing to pay $80 for a cable in-store when they know they can buy an equivalent product online for $5," said Rakesh Agrawal, principal analyst at San Francisco-based consulting firm reDesign Mobile.

On a conference call, Best Buy executives said they expected the retailer to benefit from its promise to match competitors' prices on some items during the holiday shopping season, and from additional training it gave workers at its stores.

Outgoing Chief Financial Officer Jim Muehlbauer tried to reassure investors that things will get better in the all-important holiday quarter.

"We do not expect fourth-quarter operating income to decline at rates experienced in the third quarter," Muehlbauer said, citing new products, better inventory management.

Some Best Buy investors say the company's weak results and Joly's plan make them more willing to consider a buyout offer from Schulze.

Best Buy "certainly has a right to exist, but at a much smaller scale," said Frank Lombardi III, a portfolio manager at Cubic Asset Management in Boston, which has $400 million under management. "I think the long-term strategy for them to operate as a public company and for them to use my capital to execute a strategy is ultimately flawed."

Schulze is expected to submit a final buyout proposal for Best Buy in December after seeing how the company is performing in the crucial holiday season, sources have told Reuters.

He is currently working with at least three private equity firms to line up financing for a deal. Any new bid is likely to come in below his initial proposed of $24 to $26 per share, made in August. Best Buy's stock has tumbled since then.

Best Buy, which also faces cutthroat competition from the likes of Wal-Mart Stores Inc (WMT.N) and Apple Inc (AAPL.O), said its net loss was $13 million, or 4 cents a share, in the third quarter, ended November3, compared with a year-earlier profit of $173 million, or 47 cents a share.

Excluding restructuring charges, the company earned 3 cents a share, far below analysts' average estimate of 12 cents, according to Thomson Reuters I/B/E/S.

Sales fell to $10.75 billion from $11.15 billion.

Sales at stores open at least 14 months fell 4.3 percent, including a 4 percent decline at the company's U.S. unit.

Best Buy's domestic business suffered from higher selling, general and administrative costs, falling sales, and customers' holding back on some purchases in anticipation of major product launches.

While demand was strong for mobile phones, appliances, tablet computers and e-readers, there were few takers for notebook computers, gaming products and televisions.

Same-store sales fell 5.2 percent at the company's international unit, hurt by weak sales in Canada and China.

(Reporting by Dhanya Skariachan, Olivia Oran and Nivedita Bhattacharjee; Editing by Gerald E. McCormick, Lisa Von Ahn and John Wallace)

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Comments (2)
ODM1972 wrote:
I find it strange that Amazon can have a $274 million quarterly loss and they seem to be the poster child for successful retail. Look at their revenue and then look at their profit. They are a mirror image of one another. Revenue for the first three quarters was up 25%, but profit was down 130% ($454 million profit to $137 million loss). Last year was not much better. Revenue was up 36% YoY, but profit was down 45%. That has been a common trend for Amazon over the last few years. How long can they last if that trend continues? Yes, Amazon had a goodwill impairment charge that added to the already poor numbers, but last year Best Buy had a $1.3 billion impairment charge to goodwill which added to the loss reported on their 10-K. (The goodwill charge and a $1.2 billion cash payment to buyout a profit sharing agreement were the main reasons for the FY 2012 loss, according to the data in the 10-K.)

I am not defending Best Buy’s dismal quarterly numbers and if they do not change direction soon they are in definite trouble, but Amazon’s numbers are not much better.

Also, please don’t quote people who are obviously out of touch with reality like Rakesh Agrawal from reDesign Mobile. I actually buy a lot of consumer electronics gear and have done for years. You cannot buy the exact same $80 cable online for $5. If you could, I would. That is the most ridiculous thing I have ever heard. It is kind of like saying – why spend $250,000 on a car at a dealership when you can get one online for $500? Oh, that’s right, they are two completely different products.

Nov 20, 2012 5:19pm EST  --  Report as abuse
NyukNyukNyuk wrote:
“Few people are going to be willing to pay $80 for a cable in-store when they know they can buy an equivalent product online for $5,”

I’m not sure the cable example is indicative of all of Best Buy’s products, but it’s one I’m familiar with. Their cable prices seem similar to Office Depot and Officemax, but are high compared with some other retailers. The $20 Ethernet cable at Best Buy might be marginally better than the $7 cables I buy at Menards down the street, but the $7 cable is good enough and is CAT-6 compliant. That’s all I need. Likewise for HDMI and other cables I buy regularly for work. Heck, even Radio Shack will save you a bundle over Best Buy. Point is, you don’t need to compare Best Buy to the cheap online cables, you can still do much better shopping their competitors.

Another issue is product selection and obsolescence. This is a problem with all retail stores, not just Best Buy. You go in to a store and see a product you like, then go to the manufacturer’s web site, only to find that the product in the store is an old model they’re trying to get rid of, at regular price to boot. I’ve had that happen many times. For some products, it’s just a small incremental improvement in the new model, but in other fast-changing technologies, like SSD drives, you may find a vast selection of newer, better technology online than you’ll find in the store. I don’t know what the answer to this problem is, but it’s a problem that all retailers have to address.

Nov 20, 2012 9:44pm EST  --  Report as abuse
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