Analysts say Best Buy could use a reboot

  • Article by: JACKIE CROSBY
  • Star Tribune
  • March 19, 2011 - 3:30 PM

For many of the nation's retailers, the darkest days of the recession are behind them. For Richfield-based Best Buy Co. Inc., storm clouds are still brewing.

Profit margins are drooping, market share is eroding and the stock has been sliding all year. Last month, the company decided to close stores in China and walk away from Turkey, taking a hit of up to $245 million.

When Best Buy releases its fourth-quarter earnings on Thursday, CEO Brian Dunn will be in the hot seat.

"Expectations aren't that high. The bigger question will be, 'This is the situation we're in. What are you going to do?'" said David Heupel, a portfolio manager at Thrivent Financial.

"People want to walk through some details. Are you considering closing down stores? Or what are you going to do to reinvigorate sales growth at the store base?'"

Dunn, who started on the Best Buy sales floor in 1985, took over as CEO in June 2009. Since then, he has presided over a rocky time in the nation's economy and a changing competitive arena at the nation's largest consumer electronics chain.

The "connected" Christmas that Dunn predicted didn't pan out as hoped: The retailer's revenue fell 1.6 percent in December and same-store sales dropped 4 percent.

That followed a disappointing third quarter at one of the Twin Cities' largest employers: Profits and sales slid, and the company slashed its full-year profit forecast.

Best Buy's stock, which closed Friday at $31.50, has dropped nearly $20 from its peak in early January.

At least two federal lawsuits seeking class-action status have been filed over the company's falling stock, including one filed Thursday in U.S. District Court in Minneapolis. That suit said the company "astounded investors" in the third quarter when it disclosed that product sales had been declining since June 2010.

Even as Best Buy's largest competitor, Circuit City, was liquidated in bankruptcy, the company hasn't been able to significantly increase its corner on the market.

Losing its focus?

David Brennan, co-director of the University of St. Thomas Institute for Retailing Excellence, has harped on the company's focus on the higher-margin gizmos at the expense of the mass-market consumer who doesn't need to pony up for a 3-D TV.

Best Buy estimates that it lost 1.1 percent of market share in the third quarter to competitors such as Target, Wal-Mart and Trends for television sales at Best Buy continue to look disappointing, analysts say. Because TVs are a big part of Best Buy's business, it likely will be difficult for the company to quickly turn margins around.

While consumers are heading back to department stores and luxury retailers, the consumer electronics sector isn't enjoying such a rebound. February sales at U.S. electronics and appliance stores were down 2.2 percent from 2010, the only area of the 13 categories measured by the Commerce Department to decline.

Data from MasterCard Spending Pulse mirrors that downward trend: Consumer spending on electronics and appliances dropped 3.8 percent in January and another 4.1 percent in February.

Heupel predicts that analysts will cut Dunn some slack. With no innovative high-tech product on the horizon to get people jazzed about spending -- including the new iPad 2 -- it's hard to manage your way around that.

More pressing is how Dunn will head off competitors. The company still commands a third of the nation's market share of consumer electronics, and outshines other retailers when new products hit the market. None of its competitors has anything close to the Geek Squad, though Target and Wal-Mart have hired third-party vendors to do in-home set ups and handle repairs.

Service can't trump price

"Given the recession and people's frugality, the consumer is likely taking advantage of Best Buy's blue shirts to educate them -- then checking the price and going to Amazon or Wal-Mart to buy it," said Robin Lewis, a retail consultant and CEO of the Robin Report. "So they're losing out there in a big way. The education and service isn't enough to offset price wars that are going on."

Lewis, co-author of the book "The New Rules of Retail," said that in good times, Best Buy could afford to take on the extra overhead that now is cutting into its profit margins.

"They can realize competitive advantage, which I think in the long-term is going to continue to pay off for them if they can get through this competitive bump."

Best Buy's bright spot remains sales of smart and mobile phones, which grew 30 percent in the third quarter, the highest growth in gross profit of any category. And Dunn plans to open more of the smaller, female-friendly Best Buy Mobile stores, where the company is ringing up healthier sales per square foot than at its big-box stores.

"These are steps in the right direction," said Heupel.

"But what is Best Buy going to be 10 or five years from now, and has that vision changed over the last six months?"

Jackie Crosby • 612-673-7335

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