Best Buy is cautious about rest of the year

  • Article by: KAVITA KUMAR , Star Tribune
  • Updated: August 27, 2014 - 6:03 AM

After seeing what happens to its stock when investors’ hopes get too high, executives moved to tamp them down.


Best Buy's profit was better than expected as the company waits for new products during the holiday season to liven up consumer interest in electronics.

Photo: J Pat Carter, Associated Press

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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 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.

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