By Miguel Bustillo
Best Buy Co. reported a 16% quarterly profit drop and warned that an ongoing sales slump could continue through this fiscal year as the world's largest electronics chain continued to struggle amid stepped-up competition from Wal-Mart Stores Inc. and Amazon.com Inc.
The Richfield, Minn., retailer said sales at stores open at least 14 months declined 4.6% during the three months ending Feb. 26, due largely to disappointing demand for flat-screen televisions. Revenue was also hurt by a sharp drop in demand for new computers compared to 2009, when Microsoft Corp. released its Windows 7 operating system.
Still, Best Buy managed to eke out higher gross profit margins of 24.3%, up from 24% a year earlier, thanks in large part to an increased emphasis on more profitable smart phones.
Excluding a bevy of one-time charges tied to Best Buy's recent decision to shutter operations in Turkey and close its namesake stores in China, the earnings of $1.98 per share were better than Wall Street braced for. But factoring them in, net income dropped to $651 million or $1.62 a share, from $779 million in 2009.
Best Buy shares dropped 4.4% to $30.46 early Thursday afternoon following the lackluster news.
"We are never 100% satisfied with our customer experience and we intend to make it better," Best Buy Chief Executive Brian Dunn said in a conference call with investors, vowing to retool the company's big-box stores to separate the retailer from discount stores and online merchants.
With online sales growing far faster than those of physical stores, and customers growing increasingly comfortable comparing online and in-store prices with their mobile phones, analysts are growing increasingly concerned that Best Buy's business model will be under pressure.
Best Buy acknowledged that its U.S. share of the electronics market dropped more than one percentage point for the full year to roughly 22%. But Mr. Dunn and other executives played down the threat, saying that they were boosting online TV assortments to better compete with competitors such as Amazon, and evolving to emphasize appliances and used videogames in stores.
Still, company executives acknowledged they have begun considering ways to downsize the company's aging fleet of big-box stores, which have reduced selections of former hot sellers such as compact discs as digital music downloads have become dominant. Craig Johnson, president of retail consultancy Customer Growth Partners, estimated Best Buy's operating earnings per square foot dropped 8% to $36.52 over 2009, highlighting an excess of store space.
For the current fiscal year, Best Buy cautioned that comparable store sales would range from flat to down 3%, and that revenue would range from $51 billion to $52.5 billion, a modest rise of 1% to 4%.
