Shares of Best Buy fell nearly 15 percent on Tuesday after the retailer reported an unexpected decline in third-quarter profit and cut its full year earnings outlook due to sluggish sales in televisions, notebook computers and videogames.
Margins widened 90 basis points year-over-year to 25 percent, driven primarily by the growth of Best Buy Mobile. But domestic comparable store sales in the quarter fell 5 percent due to weakness in key categories.
"We end up at the challenge that consistently haunts this company: given secular issues, it is extremely difficult for [Best Buy] to drive both sales and margins simultaneously," J.P. Morgan analyst Christopher Horvers told Marketwatch.
Some on Wall Street were more dismayed to hear Best Buy estimate that its U.S. market share declined 1.1 percentage points, losing traction in TVs and gaming software. Best Buy expects its share for the year to decline.
Among the reasons given for the shortfall:
Timing: A double-digit decline in unit sales of TVs was attributed in part on its decision to promote entry-level 32-inch TVs in December this year instead of November last year. Window 7's launch also boosted last year's laptop sales.
Consumer caution: Management indicated that budget-conscious consumers were slow to buy new 3D and internet-enabled TVs. Notebooks were also hurt as shoppers switched to tablet devices instead. Said Jim Muehlbauer, Best Buy's chief financial officer, on a conference call, "There's interest there from consumers on the latest and greatest, but really they are making trade-offs."
Category weakness: Best Buy pointed to industry-wide weakness in electronics sales and that was somewhat confirmed by the Commerce Department reporting that electronics and appliance sales declined in November while apparel and other areas showed gains.
Competition: "There was an awful lot of activity in opening-price point" of third-tier branded TVs by large discounters, chief executive Brian Dunn told analysts. Sales of lower-priced laptops from competitors was also blamed. Some analysts said Best Buy wasn't promotional over Black Friday weekend. Said David Strasser of Janney Montgomery Scott in a note to investors, "We believe the mass merchants," particularly Target Corp. "were the incremental share gainers this year."
In response, Best Buy stepped up discounts for 32-inch TVs in December and increased its offerings of laptops under $400. The chain also continues to shift away from movie and music discs and toward mobile phones while more greatly emphasizing its services. Mr. Dunn finally told the Wall Street Journal that Best Buy would benefit from the upcoming release of tablet competitors to the iPad. "The more choice factors into the customer's decision, the more interesting Best Buy becomes to consumers as a place to compare and buy," Mr. Dunn said.
Discussion Questions: How may Best Buy have to readjust its approach to the consumer electronics category? Does recent softness appear to come more from internal or external causes?