Best Buy hits slump

The retailer cut profit and revenue forecasts as consumers pull back on buying high-priced items.

By THOMAS LEE, Star Tribune

February 16, 2008 at 3:29AM
A Best Buy store in Richfield.
Best Buy store in Bloomington. (Stan Schmidt — Star Tribune/The Minnesota Star Tribune)

The nation's economic woes apparently have caught up with its largest consumer electronics retailer.

Best Buy Co. Inc. slashed its profit and revenue forecasts for fiscal 2008 Friday, warning that a weak economy will mean fewer sales of flat-screen televisions, MP3 players and video games. The Richfield-based company said it now expects to earn $3.05 to $3.10 per share, down from its previous estimate of $3.10 to $3.20 a share.

"The macro-economic environment grew more challenging after the holidays," interim Chief Financial Officer Jim Muehlbauer said in a statement. "Our post-holiday results are not going to be what we originally expected."

Best Buy shares fell 2.5 percent, or $1.15, to close Friday at $44.62. The stock has dropped 16 percent since December.

Sales at stores open for at least a year will rise 2.5 percent to 3 percent for fiscal 2008, which ends March 1, Best Buy said, compared with its earlier projection of a 4 percent gain. The company expects same-stores sales to fall slightly in the fourth quarter.

The economic slump seemed to catch Best Buy off guard. Buoyed by a strong third quarter, in which profits jumped 52 percent, the company in December raised its annual profit forecast and suggested 2008 would be another strong year.

"We're basically very optimistic about the long-term future because so many elements of what we're bringing to market seem to be working at this stage," Chief Executive Brad Anderson told the Star Tribune at the time.

"We're very bullish on where the year will finish. Even more so ... we think the horizon for the company the following year is very good."

But January proved to be a soft month as consumers favored discounted items instead of the higher-priced merchandise Best Buy had hoped they would buy, analysts say.

"For several retailers, business was nonexistent in January," said Lauri Brunner, an analyst with Minneapolis-based Thrivent Investment Management, which owns 1.3 million shares of Best Buy stock. "Consumers are shopping for events. For the other days of the week, there is not a reason to shop."

With the exception of the Northeast, sales of flat-screen televisions for the Super Bowl also did not materialize, she said.

The economic malaise has affected retailers across the board. Target Corp. said January same-stores sales fell 1.1 percent compared with last year. The Minneapolis-based discount retailer, usually more immune to shifting economic winds than its competitors, predicted earnings for the last three months of the year likely would drop compared with a year ago.

Struggling consumer-electronics retailer Circuit City Stores Inc. recently said it has increased its credit line by $800 million. Chief Executive Philip Schoonover said the credit line gives Circuit City liquidity and access to the capital markets to continue a turnaround "even if the economy doesn't support us or if competition gets tougher for a period." Its same-stores sales plummeted 11 percent in December.

Britt Beemer, chairman of America's Research Group, a market research firm in Charleston, S.C., said consumer sentiment does not bode well for Best Buy. A sales slowdown combined with falling prices for electronics like GPS devices and flat-screen televisions will squeeze Best Buy's profit margins, he said.

The federal government's recently passed economic stimulus package will give hundreds of dollars in tax rebates to consumers, starting in May.

But Beemer said the stimulus package will do little to help Best Buy because consumers will use that money to pay off debt and buy lower-ticket items like food, shoes and clothing.

To make matters worse, there are no new products to excite consumers, analysts say.

"Best Buy is at the top of its game when there is new technology and people don't understand it," Brunner said.

Staying the course

Despite the economic turmoil, Best Buy executives say they will press ahead with their long-term growth plans. The company still plans to open 85 to 100 stores in the United States and 40 to 50 stores overseas in 2009.

"We're consciously choosing not to pull back on our investments, even in a difficult economy, because we are making the bet that the opportunities are rich, over the longer term," Anderson said in a statement. "When the U.S. economy regains its momentum, we believe that our results will show these to be good investments."

But that strategy has analysts split.

Mitch Kaiser, an analyst with Minneapolis-based Piper Jaffray & Co., thinks Best Buy has a good strategy. The growth initiatives will allow Best Buy to capture even more market share from weaker rivals like Circuit City, said Kaiser, who maintained a "buy" on Best Buy stock.

But Brunner of Thrivent is not so sure. Most retailers are choosing to focus on closing underperforming stores and controlling costs. Best Buy is doing "the complete opposite," she said.

Opening more stores in the face of weak same-store sales will limit Best Buy's ability to control expenses and inventory, Brunner said.

"Best Buy will have limited ability to produce upside earnings surprises," she said. Opening new stores "is not an appropriate strategy for the times we are in. The easier thing to fix is to go after the underperforming stores."

Thomas Lee • 612-673-7744

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THOMAS LEE, Star Tribune