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Best Buy Holiday Weak; Promos Hurt Earnings

MINNEAPOLIS – “An intensely promotional holiday season,” as Best Buy president/CEO Hubert Joly put it, coupled with said slow December foot traffic, shortages of key products and other factors contributed to a 1.5 percent dip in domestic holiday sales, to $9.8 billion for the nine weeks ending Jan. 4.

Significant shortages of Apple and Samsung tablets and weakness in legacy categories were other factors that forced the retailer lowered its fourthquarter and full-year earnings outlook.

Comp sales for the period slipped 0.9 percent, with growth in computing, appliances and gaming more than offsetting weakness in digital imaging, movies and MP3 players, the company said.

Indeed, U.S. appliance comps rose 16.9 percent year over year, while the computing and mobile phone categories enjoyed a 3.2 percent lift.

In contrast, CE comp sales fell 6 percent, and the entertainment category (including gaming and prerecorded music and movies) declined 6.6 percent. Services, including service contracts, extended warranties, product repair, and delivery and installation, slipped 0.9 percent.

Best Buy enjoyed its greatest success online, where U.S. comp sales increased 23.5 percent and total revenue topped $1.3 billion due to higher average order value, increased traffic and improved inventory availability as it began fulfilling some online orders from 400 stores, and what the retailer described as “intense executional focus.” The chain has since extended retail store fulfillment of online orders to all 1,000 big-box locations.

In a statement, Joly described a fiercely promotional holiday season that began with Black Friday and continued throughout the period. “When we entered the holiday season, we said that price competitiveness was table stakes and an intensely promotional holiday season is what unfolded,” he said. “It was imperative that we live up to our customer promises – and one of these promises is to offer our customers competitive prices.”

Joly added that the aggressive promotional activity throughout the retail industry “did not result in higher industry demand and had a deflationary impact on our revenue.” On a conference call he also cited such stumbling blocks as supply constraints for key products like Apple and Samsung tablets and next-generation gaming consoles; disappointing mobile phone demand due to a lack of innovation in new models; and “significant store traffic declines” between Thanksgiving/Black Friday week and Christmas.

However, he said Best Buy’s price actions and improved customer experience resulted in market share gains across nearly all product categories despite a 2.4 percent decline in total CE industry sales during the nine-week period, as reported by The NPD Group.

Chief financial officer Sharon McCollam tacitly cited Walmart – which had declared its intention to “win the holiday” – for stoking the season’s promotional fires. “As we entered the holiday period and the fourth quarter, we were highly aware of the public statements that were being made by our competitors as they related to their promotional plans,” she said. “Subsequent to those statements, however, and progressively throughout the quarter, the promotional environment continued to escalate.”

McCollam said Best Buy defended its market share by making “a significantly greater-thanexpected year-over-year investment in pricing in the holiday period.” That, together with added investments in its “Renew Blue” turnaround initiative, will drive down fourth-quarter operating income by 175 to 185 basis points, she said.

The news sent Best Buy shares down more than 30 percent in the hours following the announcement.

In a separate statement, Best Buy founder and chairman emeritus Dick Schulze said, “The message behind today’s announcement is very clear to me. Best Buy is on this journey and in this business to win, acquire, and retain new and existing customers. I have complete faith in the long-term strategy and I am confident that management is taking the steps required to win and position the company for a successful future.”

On the conference call, Joly said CE’s December market decline came as a “big surprise” after months of steady gains, but described Best Buy’s results as a one-month “bump in the road.” McCollam added that despite a “dramatic drop-off” in December traffic, inventory came out “extremely clean,” and the company is maintaining its promotional investment this month.

Looking ahead, Joly said the company’s key priorities this year are to cut more costs more quickly; to improve marketing and grow online sales through personalized messages and product recommendations; and to reinvigorate and grow Geek Squad.