Best Buy: Market share over profits

  • Article by: THOMAS LEE , Star Tribune
  • Updated: December 13, 2011 - 10:39 PM

That's the new focus at the Richfield-based electronics giant. But investors still weren't pleased with its third-quarter numbers.

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These folks waited in line for more than 10 hours in chilly weather to shop for bargains at the Best Buy in Roseville on Black Friday. Surveys found that more younger shoppers went out at midnight.

Photo: Richard Sennott, Star Tribune

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Best Buy Co. Inc. posted its first quarterly same-store sales gain in almost two years. Wall Street was decidedly unimpressed.

That's because the increase came at a steep price: Profit margins shrank significantly, and the company missed Wall Street earnings estimates by 5 cents a share.

Company shares plummeted $4.34, or 15 percent, Tuesday after Best Buy said profits fell 29 percent to $154 million because of heavy discounting and holiday promotions.

The Richfield-based consumer electronics giant eked out a 0.3 percent sales gain at stores open for at least a year. Overall, Best Buy said third-quarter revenue grew 2 percent to $12.1 billion from the same period a year ago.

It's a trade-off that investors didn't like. Best Buy should have gotten more sales bang for its discounting buck, some analysts said.

"While we think management is more focused on addressing competitive issues through better pricing and labor models, it is not producing enough top-line growth to convince investors that the longer-term challenges have changed all that much," said Daniel Binder, an analyst with Jefferies & Co., in a research note.

Binder had expected Best Buy to generate a 2 percent same-store gain in the United States; Best Buy posted barely a 1 percent domestic increase.

In a conference call with analysts, Dunn said the company said will now focus on growing top-line sales and market share, a significant change of strategy from last year, when the company emphasized profit margins.

"We purposely plan to take a leadership stance in the marketplace and stepped up our promotional efforts to do so," Dunn said.

In other words, Best Buy will continue to discount heavily, even at the expense of profits, in order to drive customers to its stores, where the company will try to sell them higher-margin services like iPad data plans and Geek Squad tech support.

Take Black Friday. The company's heavy promotions, combined with its decision to open stores at midnight, resulted in 7 percent same-store gain compared with Black Friday last year.

Dunn also noted that online customers were also visiting stores. About 1.4 million Internet shoppers visited a store to pick up their orders during the third quarter, a 40 percent gain over the same period a year ago.

"We need to be where the customers need us to be," Dunn said. "Maintaining and growing that share in the places where there is growth is critically important to us."

Dunn acknowledged the company's gross margins may suffer in the short term. But better cost control and higher operating income from its service businesses should more than mitigate that decline over the long term, he said.

But some analysts remained unconvinced. If Best Buy is going to sacrifice profit margins, the company must do better than a barely 1 percent domestic same-store gain, analysts on the conference call suggested.

The quarter "hammers home the point that [Best Buy] may be able to drive a comp, but will have a difficult time maintaining profit levels to do it as they fight back against newer competitors for share," Michael Baker, an analyst with Deutsche Bank, said in a research note. Baker downgraded Best Buy stock to "hold."

Best Buy must "figure out a way to win back share without sacrificing profits," he said.

Thomas Lee • 612-673-4113

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