Best Buy Oct. Comps Drop, Cuts FY View

By Alan Wolf -- TWICE, 11/17/2008

MINNEAPOLIS — Best Buy reported a 7.8 percent drop in domestic same-store sales in October and has lowered its guidance for the rest of its fiscal year amid what vice chairman/CEO Brad Anderson described as "the most difficult climate we've ever seen."

The CE industry's leading retailer has been unable to respond quickly enough to maintain its earnings momentum given the "rapid, seismic changes in consumer behavior" since mid-September, Anderson said in a rare, mid-quarter update.

The company also announced a 2 percent decline in September comps last month.

As a result, Best Buy is now projecting a company-wide decline in comps sales of 5 percent to 15 percent for the balance of its fiscal year (November through February), and full-year comp declines of 1 percent to 8 percent. Total annual sales are now expected to top out at between $43.7 billion and $45.5 billion, representing a decline of 1 percent at best and 8 percent at worst.

Earnings projections were reduced to $2.30 to $2.90 per share compared with a previous range of $3.25 to $3.40, representing a decline of 17 percent at the midpoint.

The forecasts were also impacted by the stronger United States dollar, which is pressuring sales and profits within Best Buy's international division.

The wide range of results reflects Best Buy's "limited ability to project revenue" due to the uncertainty of future consumer spending, it said.

"In 42 years of retailing, we've never seen such difficult times for the consumer," noted president/CEO Brian Dunn. "People are making dramatic changes in how much they spend, and we're not immune from those forces."

The company said it is addressing the new marketplace realities by "proactively" working with its vendors to adjust swollen inventory levels, and will continue to trim costs while preserving key growth initiatives. Best Buy will also remain focused on its service-oriented customer centricity strategy, which it believes has helped it outperform the industry.

The retailer said it gained market share in most of its product categories last month, suggesting even deeper sales declines by other CE retailers, and expects to capture more share and customers as CE retail consolidates.

In a research note, Banc of America Securities analyst David Strasser estimates that comp sales for all of CE retail are falling almost twice as much as Best Buy's, and anticipates "more public and private carnage to come" in the sector.

Best Buy chief financial officer Jim Muehlbauer said the company will finish its September through November quarter with higher inventory, short-term borrowings and accounts payable than previously projected as result of the rapid downturn in consumer spending, but expects year-over-year domestic inventory to be flat by the end of February.

To shore up its near-term working capital position, Best Buy has secured a new, $150 million committed U.S. credit facility that will help it address market conditions and potential opportunities, the company said. The new credit facility, which expires on Dec. 17, was undertaken partly in response to the bankruptcy of Lehman Brothers, one of the firms behind Best Buy's existing $2.5 billion revolving line of credit, which reduced the amount available to the company.

Barclays Capital retail analyst Michael Lasser called Best Buy's revenue decline "dramatic and sudden," and attributed much of the comp decreases to a slowdown in traffic which has continued into November.

He added that the chain's steep inventory levels, coupled with what he described as "a glut of supply" throughout the industry, doesn't bode well for Best Buy's near-term gross margin.

The retailer will report its November comps along with its third-quarter earnings results on Dec. 16, and will report its December sales results on Jan. 9.