Best Buy says hot new products are needed to spur sales growth

Best Buy could sure use a fresh iPhone or a hot new PlayStation.

Instead, the Richfield-based retailer is up against a product dry spell, which it said nicked sales in the first quarter and is expected to drag on for months.

"We need some new excitement in those [product] categories," Chief Financial Officer Sharon McCollam told analysts as the company announced its quarterly earnings on Thursday.

While the nation's largest electronics retailer reported a hearty increase in its profits, it saw a 3.3 percent drop in quarterly revenue and a slight decline in same-store sales. The problem: electronics manufacturers are likely waiting until the holidays to unleash their next big things, leaving retailers like Best Buy without exciting new gadgets for a stretch.

Nonetheless, CEO Hubert Joly asserted that Best Buy Co. Inc. has been gaining market share as it continues to focus on being competitive on price and customer service. He lauded new initiatives such as the Samsung and Sony store-within-a-store concepts for setting Best Buy apart from the pack.

"This is a cyclical business," Joly said in a sit-down interview with the Star Tribune on Thursday. "It's driven by product cycles and innovation. So anybody who expects a completely linear evolution of the market should be more focused on maybe the insurance business or some other business, but not electronics."

Smartphone sales, in particular, will continue to be soft as consumers wait for manufacturers to release new products, the company said. Best Buy told investors Thursday that sales in the next two quarters will likely be tepid.

For its latest quarter, Best Buy swung to a profit of $461 million, or $1.31 a share, in the period ended May 3, compared with a loss of $81 million a year earlier. Adjusted earnings were flat, beating analysts' expectations.

Profits for the quarter were largely driven by the company's ongoing Renew Blue turnaround effort that aims to chop $1 billion in costs. In the first quarter, it shaved another $95 million, bringing its total annualized savings to $860 million.

And while the product lull hurt the retailer during the quarter, it isn't just Best Buy's problem. Research firm NPD reports that sales of consumer electronics were down 2.6 percent industrywide in basically the same time frame as Best Buy's first quarter.

Stephen Baker, an NPD analyst, said the sluggishness in smartphones, TVs and other devices has been lingering.

"We've had some game-changing, enormous products that added billions of dollars in revenue over the last few years," he said, citing the move to smartphones and the introduction of tablets. "At least right now, it's tough to see anything that can add those kinds of revenues to the industry."

But given Best Buy's dominance, the retailer is poised to get its fair share, if not more, when the next hot product emerges, Baker said. And David Strasser of Janney Capital Markets said Best Buy's new store-within-a-store concepts are helping to "revitalize what was an increasingly mundane shopping experience" and should help drive more traffic and sales.

Still, Best Buy continues to face broader challenges as it grapples with declining sales and rapid price compression of products like TVs and computers. And "competition from Amazon and consumer electronic vendors is unlikely to abate anytime soon," said Morningstar analyst R.J. ­Hottovy in a research note.

Such pricing and product pressures have taken a toll on Best Buy's stock price. After tripling in value last year to over $40, Best Buy shares are down about 40 percent this year since reporting in January deeper-than-expected pressure on holiday revenue. The stock rose 87 cents, or 3.4 percent, to $26.22 on Thursday.

For his part, Joly said there are some bright spots on the horizon, such as video games that will augment the new consoles that debuted last year. And appliances continue to be a strong category for the retailer as the housing market recovers.

The prices on ultra-high-definition TVs should also come down substantially later in the year, which should help Best Buy capitalize on its Sony and Samsung mini-stores.

"We're going to be the destination for that," Joly said.

Another highlight was the company's digital sales, which saw a 29 percent year-over-year gain in the first quarter. Joly said that was bolstered in part by the company's recent shift into making all of its 1,400 stores into shipping centers, which not only has sped up delivery times but also has reduced the number of times an online sale is lost because distribution centers are out of an item.

The way Best Buy communicates with customers is changing, too. The retailer is updating its marketing strategy so it can send out more personalized correspondence to customers.

"We have this huge customer database," Joly said. "We know you bought a TV six years ago, so maybe now is the time to replace it. Or we know that two years ago you bought the iPhone 4, so when the iPhone 6 comes around, we can talk to you about this."

Kavita Kumar • 612-673-4113