Minneapolis — Best Buy reported a 23 percent decline in net earnings, to $570 million, for its fiscal fourth quarter, but boosted revenue 10 percent to $14.7 billion for the three months ended Feb. 28.
Earnings were impacted by restructuring and impairment charges of $144 million, which included severance costs related to the recent downsizing at corporate headquarters and at Best Buy’s Canadian and Magnolia Audio Video operations.
Profits were also squeezed by a 5 percent decline in same-store sales, the company said, which was caused by a drop-off in customer traffic. The comp-sale declines were partially offset by an increase in average ticket, and the rate of decline slowed in the January to February period to 2.5 percent, from the 6.8 percent tumble in December.
The net addition of 213 new stores and the inclusion of Best Buy Europe’s revenue drove the 10 percent gain in net sales. Excluding the effect of currency fluctuations and the contribution of the European business, net sales slipped 2 percent.
The gross profit rate edged up to 24.6 percent, from 23.7 percent for the prior-year period, thanks to a shift to higher-margin mobile phones and more profitable home-theater and computing sales.
Best Buy estimated that its domestic market share grew about 1.2 percent, to 22 percent, as of Jan. 31 as a result of Circuit City store closings, solid store-level execution, new locations, and strong sales in key product categories like notebook computers and flat-panel TVs.
The company managed to reduce its inventory levels in response to the “dramatic changes in consumer demand,” but also experienced domestic inventory shortages in certain categories late in the quarter, due to higher-than-planned demand and limited availability of product.
“We responded quickly and effectively to the rapid changes in the macro-economic climate,” said Brian Dunn, president/COO, who becomes CEO in June. “It’s challenging to accurately gauge the level of demand, which has resulted in inventory gaps that have limited our ability to fully meet customer demand. We’re addressing those areas, and we continue to see tremendous opportunities around us.”
Despite the profit squeeze, results exceeded Wall Street forecasts and Best Buy’s own expectations, and the company was rewarded with a 16 percent surge in share price following its earnings announcement. Analysts also lauded its encouraging guidance for the current fiscal year, with projected revenue of between $46.5 billion and $48.5 billion up an average of 6 percent over the $45 billion in total revenue for fiscal 2009 — which itself was ahead 12.5 percent year-over-year.
In a conference call, Dunn said the chain’s out-performance underscores its core philosophy that hard times create new opportunities, and that Best Buy intends to take full advantage of them.
Those include the chance to gain new customers and win back old ones, particularly those that had previously shopped at Circuit City. Best Buy’s market share gains will translate into millions of new customers, he said, and he intends to grow that base through store-level entrepreneurship backed by the company’s massive scale and resources.
Given the global economic downturn, Dunn has reined in expenses by cutting costs and slashing capital expenditures in half, resulting in fewer new store openings. Funds will be directed instead at “key drivers” like overseas growth and Best Buy Mobile, the new small-store format that has been successful at presenting “connected digital solutions” for cellphones and portable computers, he said.
In his final Q4 conference as CEO, Brad Anderson dismissed naysayers who question the viability of the CE industry and cite competitive threats from Wal-Mart and e-tailers. CE’s growth rate has held up better than other discretionary categories, he said, and the impact of consumer technologies on society runs deep and wide. “We have not scratched the surface of what we can do with digitization,” he said, “and Best Buy can help.”
The company will not cede space to mass merchants, Anderson added, and, as the industry’s No. 1 buyer which also does its own sourcing and manufacturing, will not have to lower its prices. Best Buy has always faced direct-sales competition, he noted, beginning with catalogs, and is successfully co-existing with such direct-sale vendors as Dell, Apple and Hewlett-Packard, which are well-represented within Best Buy’s stores.
“We have always faced these threats and adapted, and see any new threats as a challenge,” he said. “To live to be 43 years old, we’ve learned to surmount larger obstacles.”
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