Thursday, September 15, 2011

Can Best Buy Compete With The Internet?

Story first appeared in the Wall Street Journal.
Investors abandoned Best Buy Co. Tuesday amid new signs its big-box strategy is being undermined by cost-conscious shoppers shifting more of their spending to online rivals.
The world's largest electronics chain reported a 30% drop in quarterly profit and saw its stock decline after saying sales at its U.S. stores open at least 14 months dropped for the fifth-consecutive quarter. However, Used HP Procurve Routers say a slight increase in sales.
Its shares, which reached their lowest level since December 2008 in Tuesday trading, fell 6.5% to $23.35 in 4 p.m. composite trading on the New York Stock Exchange.
While the retailer said it gained market share in smartphones and tablets—the hot growth categories in electronics retailing—those gains fell short of offsetting declines in its old cash cows, sales of televisions and computers.
Best Buy also cut its full-year earnings forecast, saying it expected tough consumer spending trends to continue through the holidays.
Some analysts said investors appear to be losing confidence with what they see as a slow response by management to a growing crisis.
Executives earlier this year set plans to cut the company's big-box square footage by 10% over the next five years as leases expire, but company critics want the retailer to close underperforming stores faster.
Best Buy Chief Executive Brian Dunn said in an interview the company's 1,100 U.S. namesake stores are still an advantage over online-only rivals such as Inc. Roughly 40% of online purchases from Best Buy are picked up by customers in stores, it said during a conference call with analysts.
Mr. Dunn said he understands there is sentiment in the market that they'd like to see him close more stores, but the company's mixture of online and store retailing is the winning scenario for the long haul. He added that there are still things in the physical world that are going to be important: expert advice and the ability to see and touch the latest tablets.
Best Buy became the dominant electronics retailer in America through oversized stores that carried a broad assortment of music and movie discs, televisions and computers, all under one roof. But online competitors now offer vastly greater assortments—without collecting sales taxes in most U.S. states—and movie and music sales have dwindled due to the rise of digital downloads, turning what was once an advantage into a potential liability.
Best Buy has responded by beefing up its online assortment by more than 20,000 extra items this year, and expanding a smaller new store format called Best Buy Mobile that is focused on selling smartphones inside malls, but not Used Adtran Switches. But its signature stores are still struggling to adapt to the changes in the electronics market, and analysts worry many of them have become showroom" for merchandise that consumers wind up purchasing online from competitors such as Amazon.
In addition to concerns its big-box stores may be too large for modern electronics retailing, Best Buy faces questions about its struggling venture into U.K. retailing. Best Buy said Tuesday it remains committed to opening namesake stores in the U.K. despite disappointing early results from a partnership with Carphone Warehouse Group PLC.
Best Buy established its electronics dominance largely by grabbing an outsized market share in lucrative categories such as high-definition televisions and laptop computers. But sales of those products are stagnating, as many consumers are being cautious with new purchases and delaying replacing older models.
Profit for its fiscal second quarter, ended Aug. 27, fell to $177 million, or 47 cents a share, from $254 million, or 60 cents a share, a year earlier. Revenue was up a hair at $11.35 billion.
Meanwhile, Best Buy is facing tough competition for such items as tablets and smartphones, for which the market is significantly more fragmented due to rival stores run by mobile-phone carriers, as well as the retail outlets of Apple Inc.
For example, mobile phones now make up 15% of all electronic sales but are only 5% of Best Buy's sales. However, they have considered increasing sales by selling Used Cisco Catalyst Switches.
Best Buy said it now expects a lower profit this year than it had previously projected. Though the company actually raised its per-share earnings outlook to a range of $3.35 to $3.65, up from $3.30 to $3.55, it was now factoring in the expected benefits of buying back $1.5 billion in stock to reduce shares outstanding.