Best Buy’s top executives signaled Thursday that the retailer’s high-flying sales growth of the last six months will once again slow during the holidays.
The fourth quarter, which accounts for a third of the electronic chain’s annual sales and half of its annual profits, has been a rough go for the company in recent years with sales sliding during the past two holidays.
It’s a time of year when more retailers sell electronics, which are popular gifting items, promotions become rampant, and pricing wars with competitors such as Amazon.com, Walmart and Target become especially fierce.
So the “magnitude” of Best Buy’s differentiation is often not as apparent during the holidays as it is during the rest of the months of the year, said CEO Hubert Joly.
This year, he added, Best Buy has factored in the potential for product shortages, which was a major issue last year. Executives are also being mindful that consumers may not have as much money left for other purchases given the high price of the highly anticipated iPhone X that launched earlier this month, though he didn’t specifically name it.
“There’s a very iconic new phone that sells for $1,000 or more,” he told reporters. “There’s a limit to the wallet of most consumers. We’re always aware of that.”
Best Buy raised its outlook for the holidays on Thursday, which now calls for comparable sales growth of between 1 and 3 percent. But that represents a deceleration from the 5.4 percent jump it logged over the summer and the 4.5 percent increase it reported Thursday in its fall quarter.
Best Buy’s shares fell about 4 percent Thursday given the forecast, which also included lower profit targets than analysts had projected as the company said it was stepping up investments in e-commerce and supply chain and would have higher costs to pay employees more in incentive compensation due to the retailer’s robust performance this year.
R.J. Hottovy, an analyst with Morningstar, said it appears Best Buy may be giving itself some breathing room in its forecast so it can come out ahead of it.
“They’ve left themselves open for some upside,” he said. “They’re in a decent position for the holidays, but it’s also going to be very competitive.”
In the fourth quarter, Best Buy will benefit from the shift of what it estimated was $100 million in missed sales in the third quarter from the later-than-usual launch of the iPhone X. Apple released the updated iPhone 8 in September on its usual schedule but the iPhone X, with a new design and higher price that is now at the top of the iPhone lineup, reached stores less than two weeks ago.
In addition, it is lapping last year’s holiday quarter when the company estimated it lost out on $300 million to $400 million in potential sales due to the recall of the Samsung Galaxy Note 7 and what executives called an “unprecedented” number of shortages on products such as the Apple Watch 2, Amazon Echo, Google Pixel and the Nintendo NES Classic.
On a conference call, Seth Sigman, an analyst with Credit Suisse, said that given those tailwinds, Best Buy’s guidance seems to imply that the rest of its business will be slightly down during the holidays.
Corie Barry, Best Buy’s chief financial officer, said his math was right.
“In the underlying business, it’s not that we particularly see a lot of risk,” she said. “I think we’re trying to be thoughtful about the puts and takes across the business. Obviously during the holiday season, in the competitive environment that you’re going to see, not everything performs as it does during” the other quarters of the year.
While some were disappointed by Best Buy’s forecast, Peter Keith, an analyst with Piper Jaffray, wasn’t bothered by it.
“We believe it is prudent for [Best Buy] to guide the quarter conservatively,” he wrote in a research note.
He added that Best Buy saw growth across nearly all categories in the third quarter, which suggests its trends will be sustainable over the long term since it’s not tied to just one product cycle.
In the August-to-October quarter, the biggest drivers of the company’s 4.5 comparable sales increase in the U.S. came from appliances, computing and smart home. Online sales rose 22 percent.
“You almost have to pinch yourself in thinking about where we’re at now compared to five years ago,” Joly said to investors, nodding to the retailer’s recent turnaround from a time when showing any sales growth seemed elusive.
Overall, revenue rose 4.2 percent to $9.32 billion, which was lower than analysts’ projections. In addition to the later-than-expected launch of the iPhone X, Best Buy said its third-quarter sales and profits were also slightly affected by the natural disasters in Texas, Florida, Puerto Rico and Mexico.
Best Buy’s net profit increased 23 percent to $239 million. Adjusted for one-time charges, its earnings per share met analysts expectations at 78 cents.
On Thursday, executives also gave an update on the in-home adviser service that rolled out nationwide in September. Due to a big demand for appointments, Best Buy said it will add another 75 employees to its current roster of 300 advisers by early next year.