Best Buy Co. Inc. CEO Hubert Joly said Thursday that the consumer electronics giant would stick to its turnaround strategy even as Wall Street punished the company for delivering lackluster holiday sales.
Despite an aggressive effort to compete against Amazon and Wal-Mart, including matching competitor prices, the Richfield-based retailer said sales at stores open for at least a year fell 0.9 percent in November and December. The deep discounting also took its toll on Best Buy’s profit margins, forcing the company to seek faster and deeper cost cuts beyond the $725 million Joly had already promised to investors two years ago.
Best Buy stock, a darling of the Standard & Poor’s 500 index last year, plummeted 29 percent, or $10.74, to close Thursday at $26.83. They were down another 6 percent in afternoon trading Friday.
In an interview with the Star Tribune, Joly said the company still managed to win market share because of its “price investments.”
“We felt we absolutely did the right thing” to compete with Amazon on price, Joly said. “We have no regrets. There is no reason to change strategy.”
For strong and struggling retailers alike, it was a brutally competitive holiday shopping season.
Despite a robust 4.3 percent rise in holiday same-store sales, Macy’s Inc. last week said it will shed 2,500 jobs nationwide. J.C. Penney, which has yet to find its footing after firing former Target executive Ron Johnson as CEO last year, said it will cut 2,000 positions and close 33 stores, including its location in Worthington, Minn.
“Retailers have drawn a line in the sand,” said Gerry Storch, a former CEO of Toys ‘R’ Us and vice chairman at Target. “They are saying, ‘We are not going to let Amazon win on price.’ That comes at a big cost. But the opposite [doing nothing] is the worst. Best Buy is doing a real good job, but it’s very challenging.”
Best Buy’s holiday performance comes as a disappointment to executives who were hoping to improve on 2012. In addition to Best Buy’s rising confidence and its aggressive holiday posture, the company also hoped to benefit from a strong mix of products this holiday season, including televisions, tablets, and the PlayStation 4 and Xbox One, the first new video game consoles in seven years.
Best Buy needed to hold its ground against Amazon in order to buy more time for the brick-and-mortar chain to transform into an “omnichannel” retailer that can sell merchandise just as well through the Internet as it can in stores. Indeed, even as its stores were fighting for sales, Best Buy’s online sales jumped nearly 24 percent from the same holiday period in 2012.
“Best Buy is still trying to right a big ship,” said Laura Kennedy, an analyst with the Kantar Retail consulting firm in Boston. “They are going to have to wait it out.”
For 2014, Best Buy will focus on updating its marketing efforts, Joly said. Normally, the company has primarily relied on glossy ad inserts in Sunday newspapers to promote its products. Joly wants the retailer to use e-mail as a way to offer personalized offers to consumers.
Best Buy, which operates 1,000 stores in the United States, also will seek greater savings than it previously announced. So far, the retailer has shaved about $550 million of the $725 million it pledged to save. Joly now says Best Buy will go beyond $725 million, though he declined to specify a number.
Though Joly wouldn’t rule out closing stores and cutting more employees, he said most of the cost savings will come from improving the efficiency of its supply chain, such as reducing product returns and doing a better job at selling clearance and open-box items in stores and on the website.
Best Buy’s holiday numbers were a sobering reminder to employees and investors alike that the retailer still faces a long road ahead, Joly said.
“When our stock price goes up, people get excited about it,” Joly said. “There is risk for complacency. I tell our executives not to pay attention to the stock price. Pay attention to what they can control. We’ve always said this was a long-term thing, two to three years.”
One person who has the most to lose when Best Buy shares decline offered his support to Joly on Thursday. In an unusual statement, founder and chairman emeritus Richard Schulze said he still believes in Joly’s turnaround efforts. In February 2013, Schulze officially ended his bid to acquire Best Buy and make it a private company.
“Best Buy is on this journey and in this business to win, acquire, and retain new and existing customers,” said Schulze, who still owns 17 percent of the company. “I have complete faith in the long-term strategy and I am confident that management is taking the steps required to win and position the company for a successful future.”
Joly said he and Schulze came up with the idea for the founder to issue a statement of support.
“We both knew that the stock market would be surprised,” Joly said of the holiday results. “He [is] so passionate in his belief that Best Buy is moving in the right direction.”