Best Buy Q3 Sales, Market Share Take Hit From Slower TV Business

That Best Buy “elected not to chase” the promotional TV business dominated by “large discounters” selling “third-tier” brands helps explain why the company’s U.S. same-store sales fell 5 percent Q3 through Nov. 27, CEO Brian Dunn said Tuesday on an earnings call. When the quarter began, Best Buy thought same-store sales would have “flat to modest” growth from a year earlier, Chief Financial Officer Jim Muehlbauer said.

The weaker-than-expected Q3 same-store sales results prompted Best Buy to downgrade its forecast for the fiscal year through February 2011, Muehlbauer said. The chain now expects to report earnings of $3.20-$3.40 a share. As recently as mid-September, Best Buy upgraded its earnings per share forecast 10 cents to $3.55-$3.70. Q3 net income fell to $217 million from $227 million on a 1.1 percent revenue decrease to $11.89 billion.

The good news for Best Buy from Black Friday weekend was that its salespeople improved their “close rates” and moved more units per transaction at higher average tickets than the equivalent weekend a year earlier, Dunn said. The bad news, he said, was that those “metrics” were “better for the weekend than they were for the whole quarter.” Though Best Buy’s TV business in the quarter improved month to month, “the quarterly results fell below our expectations,” he said. He cited the “weaker overall demand environment for TV, along with slower adoption of new technology” such as 3D TV and Internet-connected TV.

Best Buy lost 110 basis points of market share in Q3, the chain said. Dunn suggested that the share was lost to unspecified large discount chains that successfully sold third-tier TV brands as “loss leaders,” to Best Buy’s detriment. Contrary to those discounters, “our value proposition is based on the best selection of the world’s greatest brands with leading-edge technology and great prices.” In Q-and-A, Muehlbauer said Best Buy has a history of dabbling in loss-leader TV lines but sees the need to “balance” the higher store traffic it draws against considerations such as building gross margins. In the end, he said, Best Buy has largely shied away from such promotional activities, because its surveys have shown that customers who shop Best Buy for third-tier brands generally don’t stay on as loyal customers. Dunn chimed in to call the balance a “tightrope” walk that Best Buy takes every day.

Newer TV technologies like 3D TV and IPTV, “which we assort more broadly than anyone, have been slower to take hold” than the industry expected, Dunn said. “We're confident that these exciting new technologies will take off, and when they do, we expect to benefit from being the leader,” he said. That growth in Best Buy’s Magnolia business “has been very strong recently” the chain sees as “an encouraging bellwether of consumer adoption of new home theater technology,” he said. President Mike Vitelli suggested that 3D TV sales have been “slower than the industry wanted” not only because little 3D content has been made available, but also because tablet computers have “extracted” a high volume of “early adopter dollars” from the market. Dunn said “this won’t be the year” early adopters buy both a tablet PC and a new large-screen 3D TV during the holiday selling season.

Videogame sales in Q3 at Best Buy also “lagged,” Dunn said, marked by sales of new game titles that have not been “as strong as expected.” Still, Best Buy thinks it’s well positioned with game enthusiasts to “grow the category,” he said. Short term, “we feel very good” about early sales of the Kinect and Move gaming peripherals, he said. Best Buy holds the top share in sales of both controllers, and that position has “a positive impact in November,” he said. Best Buy also is excited about used games, “a lucrative market we have just recently entered,” he said.