Best Buy shares tumble after forecasts missed

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Best Buy, the US’s biggest electronics retailer, reported a fall in net earnings that was worse than Wall Street expected, as its decision to offer deep discounts to end-of-year shoppers yielded only a minor increase in sales.

The retailer’s net profit fell by 29 per cent to $154m, or 42 cents per diluted share, in the three months to November 26, while revenue increased by 1.7 per cent to $12.1bn. The miss sent shares in Best Buy down 11.7 per cent to $24.80 by midday in New York.

Brian Dunn, Best Buy’s chief executive, said the results were good, but analysts noted that Best Buy had joined other retailers, faced with stiff competition and cash-strapped consumers, which were sacrificing profits to defend market share in the holiday shopping season.

The results “pointed to troubling underlying trends,” noted Gary Balter, analyst at Credit Suisse. “While the company got much more aggressive on pricing, it was unable to convert that aggression into better [sales], with gross margin dollars showing its worst decline of the year.”

During the quarter like-for-like US sales at stores open at least one year edged up by only 0.3 per cent, although that represented the best performance since the first quarter of 2010.

The quarter ended on the day after Black Friday, the post-Thanksgiving shopping day that is one of the busiest of the year. Mr Dunn said: “While we’re pleased with the strong demand we saw for Black Friday weekend, we’ll have to see how the rest of the year plays out.”

Greg Melich, analyst at ISI Group, said in a note that Best Buy’s results were “a reminder that [the company] remains structurally challenged from mobile commerce, Apple and Amazon”.

These forces have combined to threaten Best Buy’s business, not least as smartphone-toting shoppers use its stores as showrooms and then buy elsewhere.

Mr Melich noted that management was taking action to offset these trends, including investment in its own website. Online revenue was up by 20 per cent in the quarter.

Best Buy executives were questioned on a call with analysts over possible cuts to the company’s cost structure that could reverse the decline in profit margins.

The company said in June that it would cut its “big box” retail space in the US by 10 per cent over the next three to five years, but Mr Dunn said bricks-and-mortar still have a role and provided “a huge advantage” as online shoppers used stores to pick up goods or receive services.

During the quarter, the company said it would close its lossmaking big box stores in the UK and buy out its British partner in Best Buy Mobile for $1.3bn, to refocus globally on selling internet-enabled devices ranging from phones to televisions.

Excluding one-off items, net income was 47 cents per share, compared with analysts’ expectations of 52 cents per share.

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