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Best Buy (BBY)
Best Buy Remains Confident as 1Q Profit Drops
Best Buy may be able to surpass Wall Street's expectations and claim the number one spot, but sales at the electronics chain are far from impressive. The largest electronic chain reported on Tuesday that first-quarter profit fell 15%. For the period ended May 30, Best Buy posted income of $153 million, or 36 cents a share, down from $179 million, or 43 cents a share, a year earlier. The latest quarter included six cents a share in restructuring charges. What factors led to this decline? How does Best Buy believe it will perform in the coming months?
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Although sales and profit declined in the first-quarter, the electronics chain still managed to beat Wall Street's estimates. Investors appeared unimpressed and slightly discouraged by Best Buy's revelation. Best Buy is running up against the same issues that many consumer-driven businesses are facing during this prolonged recession. Consumers have still not become comfortable enough with the direction the economy to run out and purchase that new flat-screen television or wait in line to purchase a brand new video game. According to Best Buy, lower demand for video games and digital cameras, and weak economies in Canada and China led to the profit shortfall. Consumers also scaled back on purchasing home appliances as they opted to repair old appliances or funneled the money elsewhere for more important expenses. Best Buy couldn't even entice enough consumers with price cuts and sales every other week.
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As consumers look around, the electronic retail industry looks dramatically different from two years ago. Consumers have watched major competitors such as CompUSA and Circuit City disappear to leave only the strongest standing. One would think that the destruction of competition would work in Best Buy's favor. Unfortunately, Best Buy is facing more competition from discount retailers such as Wal-Mart (WMT: Charts, News, Offers). Wal-Mart announced two years ago that it had partnered up with Dell, Inc. (DELL: Charts, News, Offers) to start offering computers at very competitive prices. Target (TGT: Charts, News, Offers) is another retailer that has expanded its electronic offerings to lure customers away from Best Buy. Consumers are definitely searching for the best prices. If Wal-Mart and Target continue to offer competitive prices, Best Buy will have a tough time with sales in the near future.
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Best Buy remains confident that it will hold on to the number one spot despite declining sales. The company believes that it will be able to double revenue by 2013. Future CEO Brian Dunn said, “regardless of the environment, we find ourselves in, we know that our people will continue to be our key point of differentiation in helping Best Buy grow.” Best Buy said it continues to project annual earnings between $2.50 and $2.90 per share. Those estimates include restructuring charges. The company will continue to be tested as the economy shifts from one direction to another. Consumer confidence and spending is the key to the company reaching its 2013 revenue projections.
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