Best Buy Co. Inc.’s top executives thought investors needed a reality check — and gave it to them.
Yes, they’re encouraged by the results of their expense-cutting strategy. And yes, Apple’s next iPhone and other companies’ ultra-high-definition TVs may give some lift to sales during the holidays, but not as much as some might hope.
As they announced their latest quarterly results Tuesday, executives said they don’t expect the gains from all that will be able to offset the downward sales pressure the Richfield-based retail giant has been under for two years. So they forecast a drop in sales at comparable stores for the next six months, including during the crucial holiday season.
Best Buy’s stock, which had risen 22 percent over the last three months, fell 6.9 percent on Tuesday as a result.
“Our sense was the investors, based on their modeling, were more bullish than we were,” Hubert Joly, Best Buy’s chief executive, told the Star Tribune. “We wanted to manage expectations.”
The company has seen what happens when investors’ expectations get out of control. In January this year, when Best Buy reported disappointing holiday sales, its stock tanked more than 30 percent in two days, its worst performance in 14 years. Before that, Best Buy’s stock had been a darling of the S&P 500, with its shares tripling in 2013.
“I think it’s wise for Joly to guide expectations lower,” said Ken Perkins, president of Retail Metrics, adding that it’s a highly competitive environment in which traffic levels in stores have been declining industrywide. “For CEOs, it’s often better to underpromise and then overdeliver, especially in this market.”
Minneapolis-based Target Corp. took a similar approach last week when it lowered its profit outlook for the rest of the year in a nod to the overall difficult and promotional retail environment.
“It’s across the retail spectrum,” Perkins added. “Most consumers aren’t seeing their paychecks grow. The pie isn’t really growing that much.”
But despite the conservative outlook from the Best Buy executives, some analysts were still upbeat.
David Strasser, an analyst with Janney Capital Markets, said in a research note that mobile phones “may be less bad” than Best Buy is projecting and there may be more of an upside to ultrahigh definition TVs.
But he added that he was surprised that the retailer’s stock had risen so much in recent weeks because of executives’ warning in May about sluggish sales amid a lack of newness in consumer electronics.
“Put aside the near-term product cycle issues and a lot is happening at this company,” he wrote. “The industry is consolidating and [Best Buy] is disproportionately taking market share.”
In its second fiscal quarter ended Aug. 2, Best Buy cut another $40 million in expenses toward its goal of extracting $1 billion from the business as part of its “Renew Blue” turnaround strategy. It’s now just $100 million shy of that target. Reductions have come through thousands of job cuts, renegotiating contracts with vendors and other steps.
Best Buy has been using those cost savings to invest in price-matching amid fierce competition from online retailers such as Amazon.com Inc. and to grow profits.
Indeed, while revenue fell, Best Buy’s profit was better than analysts expected. Adjusted to exclude one-time items, its profit from continuing operations amounted to 44 cents a share, well above the 31 cents that analysts had forecast. It was also above the 32 cents a share Best Buy reported in the same three months a year ago.
Comparable sales at U.S. stores fell 2 percent, roughly in line with the consumer electronics market as a whole, Best Buy said, citing data from the NPD Group.
Revenue was $8.9 billion, down 4 percent from $9.3 billion a year ago.
There were bright spots in the quarter, including a 22 percent increase in online sales in the U.S.
Joly didn’t rule out the possibility of excitement around new products later in the year to enliven holiday sales. But he noted that mobile phone sales have been soft amid anticipated launches of new phones. And when Apple Inc.’s iPhone 6 does hit the market, there may be limited quantities initially. He also pointed out that smartphone penetration among Americans is already pretty high, so it’s unclear how many people will upgrade.
Best Buy has also been betting on the future of ultra high-definition TVs, showcasing them in its store-within-a-store experiences in partnership with Samsung Electronics Co. and Sony Corp. that have been rolled out to 800 stores so far this year. But Joly acknowledged that the prices of those TVs, which start around $1,000 and go up from there, are still out of reach of most consumers.
“While we’re very excited about the prospect for that category, the impact for this year will be limited because this is going to be a product category for early adopters, not for the average consumer,” he said.
But when it comes to the things Best Buy can control, Joly said the retailer has been building momentum. It invested in tools to make sure it gets a better return on promotions. And it will spend $40 million to $50 million in the second half of the year on improvements to its website and getting products delivered to consumers faster.
“Best Buy is maniacally focused on the customer,” Joly said. “Irrespective of the channel, we are making it a very exciting destination for all of the shiny objects we sell.”