Best Buy shares plunge after holiday sales report

Star TribuneJanuary 17, 2014 

MINNEAPOLIS -- Best Buy Co. Inc. shares fell hard Thursday after the company announced that its revenue fell during the holiday period, surprising investors who were expecting a small increase.

The company said its U.S. comparable sales, those at stores and online operations open at least 14 months, fell 0.9 percent, below the market expectation of a gain of around 0.7 percent.

The numbers were a bitter disappointment for company's top executives who had high hopes going into the holiday shopping season that Best Buy would easily beat the flat comp holiday sales from 2012.

Best Buy CEO Hubert Joly pledged an aggressive strategy to win market share by pledging to compete head on with Wal-Mart Stores Inc. and Amazon.com Inc. In addition, Best Buy had the benefit of strong product mix, improving television sales and the introduction of the Sony PlayStation 4 and Microsoft Xbox One video game consoles.

In the end though, Best Buy sacrificed a considerable chunk of its profit margin to earn a negative comp sale.

In a conference call with analysts, Joly called the performance a "bump in the road" following a year in which the

Richfield, Minn.-based company, which operates the nation's biggest chain of electronics retail stores, turned around its financial performance by restructuring its product mix and aligning its online business with its stores more closely.

Best Buy also issued an unusual statement from founder and chairman emeritus Richard Schulze, who pledged his support to management. Almost a year ago, Schulze, the company's largest investor, officially ended his campaign to take Best Buy private.

"The message behind today's announcement is very clear to me," Schulze said. "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."

The company's shares tripled last year, making Best Buy one of the best-performing large companies on Wall Street last year.

Shares tumbled off their highs in November, however, when Chief Financial Officer Sharon McCollam warned that the holiday season was shaping up to be "increasingly promotional" and that the company intended to match discounting done by other retailers.

Thursday morning, Joly said that the decision to keep prices competitive "did come with a higher-than-expected cost." He said the company's operating income rate would be 175 to 185 basis points lower than last year's level. He also said that promotions had continued into this month, the last of Best Buy's fiscal quarter.

Joly also said the company would accelerate its campaign to cut costs. In the past year or so, Best Buy has laid off employees at its corporate headquarters, first in one large burst and subsequently in small groups on a weekly basis.

Joly said the company was also "outcompeted" in its online operations. In the conference call, he noted that Amazon.com was able to deliver merchandise to shoppers at the last minute just before Christmas more capably than Best Buy. He also expressed dissatisfaction with the personalization capabilities of the company's website.

But executives noted that Best Buy's inventories are "extremely clean," meaning that the lower pricing had moved out merchandise and would not leave the retailer with more costs down the line for getting rid of less-desired items.

Best Buy's total revenue during the holiday sales period, which it counts as the nine weeks that ended Jan. 4, was $11.5 billion, down from $11.8 billion a year ago. Much of that decline, however, stems from the fact that last year's figure included results from a British subsidiary that it sold during the year.

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