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 The company blamed intense discounting by rivals, tight supplies of
phones and high-end tablets industrywide, and weak traffic in
December.
The news, which knocked off almost $4 billion of Best Buy's market
value, was the latest evidence that holiday sales at many chains
came at the expense of profit.
"It just seems that the promotions did not drive incremental sales,
that opening on Thanksgiving just added costs," Janney Capital
Markets analyst David Strasser said.
Adding to the pressure on Best Buy, he said, was the "promotional
cadence of troubled retailers" like Sears <SHLD.O>, Toys R Us Inc
and smaller electronics chains.
Best Buy cut prices sharply in November and December to thwart
competition from Wal-Mart Stores Inc <WMT.N>, Amazon.com Inc <AMZN.O>
and other chains. The electronics specialist said on Thursday that
it continued to discount in January.
Best Buy's stock, one of 2013's hottest, was down 27.6 percent at
$27.19 after touching a low of $25.99 earlier in the session.
Heading into Thursday, only one out of two dozen analysts covering
the stock had a "sell" rating on it.
Shares of consumer electronics peers such as RadioShack Corp <RSH.N>
and Hhgregg Inc <HGG.N> also fell.
The overall weakness in the consumer electronics industry was a
"shock for everyone," Best Buy Chief Executive Officer Hubert Joly
said, but insisted that the company's own turnaround was not at
risk.
"Since the beginning, we've seen this transformation as a multiyear
journey, and we are in the early innings of this ball game," he
said.
Joly, who joined the company in the fall of 2012, has removed layers
of management, eliminated hundreds of jobs, closed unprofitable
stores and boosted cash by selling Best Buy's stake in a European
joint venture with Carphone Warehouse Group Plc <CPW.L>.
So far, he has taken out $550 million in annualized costs, and he
said he saw room to make the company more efficient by reducing and
better managing the items that are returned by customers.
Best Buy also plans to do more to personalize its email marketing
efforts, especially since it has a database of 40 million members.
In what many on Wall Street called the most promotional holiday
season since the recession, shoppers were bombarded by too many
emails from retailers, making it harder for Best Buy to stand out,
Joly said.
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Best Buy had warned in late November that its decision to discount
more could hurt margins. But some analysts had then expected the
chain to offset some of the margin pressure through cost cuts and
market share gains.
MARGINS VS. MARKET SHARE
Heavy discounting ate into profits, and Best Buy expects operating
margin, excluding special items, to be 175 to 185 basis points lower
in the fourth quarter ending February 1 than a year earlier. Credit
Suisse analyst Gary Balter said that outlook was well below Wall
Street expectations.
The discounting, however, boosted Best Buy's market share at a time
when overall industry sales fell, Joly said, citing data from NPD
Group.
Best Buy's sales at stores open at least 14 months were down 0.9
percent in the United States and up 0.1 percent internationally in
the nine weeks ended January 4. Total revenue fell about 2.6 percent
to $11.45 billion.
Declines in sales of digital imaging, movies, MP3 players and other
products more than offset strong demand for computers, appliances
and gaming devices, the company said.
Best Buy's online segment was a bright spot in the otherwise weak
report. Domestic online revenue was $1.32 billion, and comparable
online sales rose 23.5 percent.
During the most recent holiday season, Best Buy offered free
shipping for online orders of more than $25 and made its website
easier to navigate.
The company also shipped directly from more than 400 stores this
season to compete with retailers like Amazon.com and Wal-Mart. It is
now expanding that service to its 1,000 big box stores, Best Buy
said on Thursday.
(Reporting by Dhanya Skariachan; editing
by Jeffrey Benkoe and Lisa Von Ahn)
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