In an about-face from its big-box strategy of the past decade, Best Buy said Thursday it would cut 10 percent of its traditional store square footage in the United States and focus on growing its specialized, smaller Best Buy Mobile concept.
A contrite Brian Dunn, CEO for nearly two years, apologized for the chain's weak performance last year and outlined a growth strategy that also includes increasing online sales, enhanced service options and more product choices.
"We're not particularly pleased with the job we did last year," Dunn told Wall Street analysts during investor day at the company's Richfield campus. "We missed a few things. We missed the impact of the iPad. We bet on 3D TV, the whole industry did, and it didn't come in play. Those are mistakes for which I am responsible."
But overall, Dunn was optimistic about righting the consumer electronic giant in the coming year.
"The industry is changing and Best Buy is changing," Dunn said. "Best Buy remains relevant in today's ecosystem. We are adaptive learners."
The last two years have been hard on the consumer electronics industry in general, and Best Buy in particular, as fierce online competition and discounters such as Costco and Wal-Mart have eaten away some of its market share. Sales declined 1.8 percent for its most recent fiscal year and profits were down 3 percent.
Best Buy's stock, which closed Thursday at $29.46, down nearly 3 percent, has languished in recent months. In November it was near $45 a share.
The retailer said it intends to shrink its traditional "big-box" square footage in the United States by 10 percent. The move should save the retailer $70 million to $80 million annually.
Executives said "a small number of stores" in underperforming markets would be closed.
Those that remain open will gradually be transformed into a more consumer-friendly showroom where shoppers would have ample opportunity to check out competing brands of tablets and computers. The retailer plans to sublease extra square footage when possible.
Many retailers, including Target and Wal-Mart, are focusing on smaller stores for future growth, particularly in urban areas. But walling off sections of existing stores goes a step further than many chains.
"There isn't that continuing demand for the amount of space they [Best Buy] have," said Dave Brennan, co-director of the Institute for Retailing Excellence at the University of St. Thomas. "If they can shrink their stores by 10 percent, you have to wonder if that is far enough."
Part of the reason for less foot traffic is traffic on the Internet, where Best Buy competitors such as Amazon.com have a strong presence.
In response to that element of the marketplace, Best Buy said it plans to double its online sales in the United States from $2 billion in revenue to $4 billion in the next three to five years, in part by offering a greater assortment of products than it does in its stores.
But Dunn said physical retailing "still matters."
On that note, the Richfield-based electronics giant said it intends to open 600 to 800 stand-alone Best Buy Mobile stores within five years. It now has 175 mobile stores.
Mobile stores carry mobile phones and service plans. Shari Ballard, co-president of Best Buy's Americas division, said the company has been "very pleased" with consumer acceptance of the mobile brand.
Best Buy also said it expects to increase its Five Star store presence in China by 400 to 500 stores in five years, doubling its China revenue to $4 billion. Earlier this year the company retreated from the world's most populous country by closing its trademark Best Buy stores there, which contributed to a $222 million restructuring charge in the most recent quarter.
Dunn said the decision to close those stores "was fiscally responsible."
Mike Vitelli, co-president of the Americas division, said Best Buy is going to make several smaller changes that should add to the financial bottom line such as letting electronic gamers preorder new games before their release date, which is when most gaming sales occur in the industry. In addition, the chain is improving its assortment of appliances.
Best Buy also announced at the conference that it is broadening the scope of items in its "Buy Back" program that allows consumers, after paying an upfront fee, to return the item for a partial trade-in value on the next generation of that item. The newest items covered by the program include gaming, digital imaging, e-readers and other devices.
"They're shoring things up," said Edward Jones analyst Matt Arnold, who has a buy rating on the stock. "They're going to be well positioned to be a player for a long time."
David Phelps 612-673-7269