MINNEAPOLIS -A softer economy, which has created increased promotional activity, is expected to reduce gross margins and profitability at Best Buy, making the retailer adjust its earnings outlook for the second half of fiscal 2001.
Best Buy reduced earnings expectations for its fiscal third quarter ending Nov. 25 to about 17 cents per share, compared to the First Call consensus estimate of 44 cents per share.
For the fourth quarter ending March 3, 2001, Best Buy said earnings would be about 90 cents per share, compared to the consensus estimate of $1.02.
"We are experiencing lower gross margins as retailers fight to gain market share in a more cautious consumer environment," said chief financial officer Allen Lenzmeier. "Our store traffic remains strong. Comp-store sales continue on plan at 5 percent."
The financial community, however, reacted swiftly to word of the new earnings outlook. Best Buy stock, hammered by the pessimistic news, dropped almost 39 percent last Thursday, closing at $32. The stock, which trades on the New York Stock Exchange, plummeted as low as $30 during the trading day. It had closed at $52.38 last Wednesday, while the 52-week high had been $88.87.
Best Buy will release actual third-quarter sales Nov. 30. Earnings will be released Dec. 12.
In a conference call to analysts last week, Best Buy cited such categories as DVD players, appliances and PCs for being under intense pricing pressure, while pointing to a "broad-based softness" in demand. Exacerbating the company's margin pressures were an increase in consumer rebates, and expenditures to market its e-commerce site open new stores.
Best Buy said that both its online business and newly opened New York stores have yet to meet expectations. It may reconsider plans to add 60 to 65 new stores nationally.
Despite Best Buy's sudden announcement of lowered earnings expectations last Thursday, RadioShack remains bullish about the upcoming holiday selling season. RadioShack issued a statement after Best Buy's announcement, saying it will meet its projection of mid-to-upper single-digit sales increases in November, with the potential for double-digit sales increases in November and December. The company also restated its confidence in First Call's fourth-quarter earnings-per-share consensus of 75 cents per share.
"Based on our October and early November results, we definitely anticipate that RadioShack will finish the year with a strong fourth quarter," said Leonard Roberts, chairman/CEO. "Our double-digit total sales gains each month this year have led to an earnings-per-share increase of 31 percent year-to-date through September. We achieved our industry leading comp-store sales growth of 10 percent in October without being overly promotional, and our operating margin improvement remains on plan." (See Radio Shack financial story, p. 6.)