Minneapolis — Best Buy is cutting its capital spending in half and will offer buyout packages to nearly all of its approximately 4,000 headquarters employees amid what vice chairman/CEO Brad Anderson called “the most challenging consumer environment our company has ever faced.”
Underscoring the point, the company’s fiscal third-quarter net earnings tumbled 77 percent to $52 million and global same-store sales slipped 5.3 percent year over year. Net sales rose 15 percent for the three months, ended Nov. 29, to $11.5 billion on gains from new store openings.
“We believe that there has been a dramatic and potentially long-lasting change in consumer behavior as people adjust to the new realities of the marketplace,” Anderson said in a statement. “We also believe that customers will continue to reward those retailers who understand their needs and desires, and offer relevant solutions at fair prices. Yet we clearly recognize that these changes require us to make significant adjustments to our present cost structure.”
To that end, the company announced a “substantial” reduction in new store openings in the United States, Canada and China next year, and is offering a voluntary separation package to most of its headquarters staff in order to significantly reduce its corporate expenses. Layoffs may also be necessary, depending on the response to the program, Anderson said.
Under the buyout plan, Best Buy is offering 7.5 months of severance pay, one year of employee-paid health and life insurance, and free outplacement services to corporate employees who leave between now and Jan. 1, according to a report by the Minneapolis/St. Paul Business Journal. Employees whose age plus years of service add up to 60 or more will receive 12 months of pay.
Best Buy said its lower third-quarter earnings were due largely to a dramatic decline in the value of its investment in its European partner, The Carphone Warehouse Group.
In the U.S., operating income fell by $46 million to $283 million for the quarter and revenue remained essentially flat at $8.2 billion despite the addition of 137 new stores over the preceding 12 months. Same store sales declined 6.3 percent for the quarter due to a decrease in customer traffic and the calendar shift that left retailers with seven fewer shopping days between Thanksgiving and Christmas. Comp sales were flat in November when adjusted for the calendar shift, and were buoyed by what Best Buy described as a “successful” Black Friday and a strong Thanksgiving weekend, although post-Thanksgiving sales trends have slowed as anticipated.
The comp decline was partially offset by an increase in the average ticket as the sales mix continued to shift toward pricier items like notebook computers and mobile phones, the company said.
Despite the soft sales, Best Buy estimated that its market share grew by 1.7 percent during the July to September period, reflecting strong performance in computers and TVs.
During the September-October period, sales of notebook computers and mobile phones were more than offset by decreased sales of digital cameras, projection and tube TVs, major appliances, music and movies. Specifically:
- Consumer electronics, which comprised 39 percent of third-quarter revenue, posted a 13.7 percent comp sales decline, driven by double-digit declines in digital cameras, MP3 players and GPS products. Blu-Ray Disc players, however, enjoyed a solid double-digit comp increase, the company said. Comp sales of flat-panel TVs experienced a low single-digit comp sales decline for the quarter as unit volume increases were more than offset by declines in the average selling prices. Projection and tube TVs declined by the very strong double digits, and total home-theater comp sales declined by the high single digits.
- The home-office category, which accounted for 32 percent of third-quarter revenue, had an 11.1-percent comparable store sales gain, fueled by a double-digit comp store sales increase for notebook computers. Mobile phones and accessories experienced a triple-digit gain in comp sales and a strong double-digit increase in wireless connections, supported by the chain-wide expansion of Best Buy Mobile. These gains were partially offset by expected comp sales declines in printers and desktop computers.
- Services, which accounted for 6 percent of third-quarter revenue, had a 1.3 percent comp gain.
- Entertainment software, which comprised 19 percent of third-quarter revenue, had a 12.4-percent decline in comp sales, driven by double-digit declines in music and movies. Video gaming comps declined by the mid-single-digits on top of a strong double-digit increase over the year-ago quarter.
- Major appliances, which totaled 4 percent of third-quarter revenue, showed a comp sales decline of 21 percent amid a depressed housing market, partially offset by an increase in average selling prices versus the prior year.
During the quarter the company opened 37 U.S. Best Buy stores, including three 45,000-square-foot stores, 32 of its 30,000-square-foot format stores, and two 20,000-square-foot stores, bringing the total flagship store count to 1,010. The retailer also opened seven Pacific Sales showrooms for a total of 29, and 18 freestanding Best Buy Mobile stores for a total of 39. The company also maintains 13 Magnolia Audio Video stores and seven freestanding Geek Squad stores.