Best Buy Warns of Sales Decline as It Laps Year-Earlier Stimulus Surge

Best Buy's Q4 fiscal 2022 comparable sales slipped 2.3%, with revenue dropping more than expected to $16.4 billion for the quarter ended Jan. 29, the company said Thursday. On an earnings call, CEO Corie Barry cited more constrained inventory than forecast, “including some high-demand holiday items,” and reduced store hours due to the COVID-19 omicron variant.

For FY 2022, revenue reached $51.7 billion vs. $47.3 billion in FY 2021, with comparable sales 10.4% higher on top of 9.7% comp sales growth in the previous year. Barry noted Best Buy had two-year sales growth of $8.8 billion over the pandemic period. Growth drivers for the year were appliances, virtual reality, home theater and headphones, offset by drops in gaming, mobile phones, tablets and services. The stock closed 9.1% higher Thursday at $110.14.

Chief Financial Officer Matt Bilunas tempered the outlook for the current year and FY ’24, saying the company will focus on investing in future growth areas such as its Totaltech membership program and Best Buy Health. FY ’23 revenue guidance is $49.3 billion-$50.8 billion, with a comp sales growth decline of minus 1%-4%, mirroring CE industry trends. The two largest variables for FY ’23 are “short-term industry declines as we lap high growth and government stimulus” along with Totaltech, which launched nationally in October. “As we look to fiscal ’25, we expect the CE industry will return to the high levels we saw in fiscal ’22,” Bilunas said.

Bilunas forecast $53.5 billion-$56.5 billion in revenue in FY ’25, skipping FY ’24, to give the company “flexibility,” he said, saying he expects improvements each year. He didn’t give guidance for Q2, saying he expects the full-year revenue decline to be weighted toward the first half of the year due to the difficult comparison with last year’s sales fueled by government stimulus spending.

Q4 net earnings dropped to $626 million from $816 million in the prior-year quarter. Barry attributed the drop to acquisitions in the quarter, costs associated with the Totaltech program, technology spending and Best Buy Health investments. Investments are “temporarily impacting our profitability,” she said: “We are deliberately investing in our future and furthering our competitive differentiation.” Totaltech and Best Buy Health are “core” to the company’s future growth, she said.

Temporary Cut in Store Hours

Q4 revenue was “slightly below” the low end of revenue guidance, said Bilunas, noting expected inventory shortages in appliances, gaming and mobile phones and higher than expected constraints in mobile phones and computing. The omicron wave and resulting high levels of employee callouts led to a temporary cut in store hours in January and February. Without inventory and omicron impacts, revenue would have been “comfortably in guidance range,” said the executive.

After two years of lower than normal discounts, Best Buy expects a return to promotionality as it looks toward FY ’25 goals. Bilunas said: “We’ll always need to be price-competitive in our business.” Gross profit rate will take a hit due to an increase in promotions, he said.

In the holiday quarter, a few categories such as headphones, computers and wearables and TVs began to return to prior-year promotional levels, said Bilunas. Some inventory issues remain due to chipset shortages and supply constraints, he said, but as those ease, he expects more categories to return to typical promotionality. Barry said: “We would have been healthy in our [revenue] range had we not had some of those very targeted … inventory constraints that were a bit larger than we thought.” A few shortages will continue into this year, she said.

A positive takeaway from Q4 was average selling price (ASP) increases as product mix skewed toward premium products, along with inflation, Bilunas said. Transactions and traffic fell in the quarter, he said. ASPs have been increasing over the past few years in computing, appliances and TVs. The retailer is having unit declines on lower ASP items such as gaming software, movies and movies that are moving to digital media, he said.

FY ’25 targets are “materially higher” than Best Buy modeled for in 2019, Barry said, saying it now expects to generate $1 billion more in operating income than previously forecast. On what has changed, she said, “The CE industry is larger than we expected.” In addition, Best Buy’s online mix doubled, and it found ways to make the operating model more flexible and efficient, while expanding the category selection, she said.

Best Buy's FY ’22 e-commerce business generated 34% share, $16 billion, of domestic sales, Barry said. The company is increasingly using stores for fulfillment, and the number of customers picking up products in stores “is impressive,” she said. The retailer has cut delivery speed by nearly half in the past few years, she said.

Industry 'Large and Growing'

Barry called technology a “necessity” and positioned Best Buy as a unique tech provider for the home. The traditional CE industry is “large and growing,” she said, showing a slide giving technology’s share of domestic personal consumption expenditure (PCE) as 4%, up from 3.5% in FY ’15. There’s no “no perfect external source that tracks our business,” Barry said, showing Best Buy’s historical view based on selected government PCE category data.

Consumer tech was growing for several years before accelerating in the past two due to the pandemic, Barry said. “We expect it to step back this year as the industry absorbs the very high growth of the past two years,” she said. Best Buy believes the consumer tech market will return to 2022 levels by FY ’25, “materially higher” than pre-pandemic. Best Buy is also expanding its addressable market by entering new markets including health, electric bikes and outdoor living.

Barry called the consumer tech market a “stable industry” that’s “no more volatile or cyclical than other large durable goods categories over time.” The past two years underscored its importance in consumers’ lives, she said. Some 40% of Americans use technology in new or different ways since the onset of the pandemic, she said, citing home fitness, videoconferencing and telehealth. Those use cases will endure, she said.

Best Buy’s $199 per year Totaltech service is profitable on a stand-alone basis but not as profitable as legacy service memberships, Bilunas said. The company views Totaltech as a “near-term investment to drive long-term value.” The service includes extended warranties and installation, services that are also stand-alone profit streams, he said. Over time, the retailer expects Totaltech to drive incremental recurring revenue and product sales; it is a “meaningful driver” of higher sales and operating income in FY ’25 targets, he said.

Totaltech has 4.6 million members, including the 3.7 million “autoconverted” from legacy support programs, Barry said. Best Buy has actively enrolled over a million members since the October launch; it plans to double the member count by FY ’25, she said, calling the program a “vital addition” to Best Buy’s customer relationship ecosystem.

Best Buy Health will take longer to ramp than previously thought, Barry said. She said the pandemic affected demand in the active aging business; she also cited supply constraints. Based on consumer behavior changes over the past two years, Best Buy “tuned” its strategy to focus on the virtual care opportunity.

Best Buy will continue to close 20-30 stores per year, said Damien Harmon, executive vice president-omnichannel. It's still investing in stores to support a “seamless shopping” experience for customers who shop online and in stores, he said. The company boosted store productivity over the past two years by “reskilling” employees to be trained in digital and physical shopping areas including fulfillment, consultation and Best Buy’s virtual store, Harmon said. Eighty percent of employees are skilled to support multiple jobs in and outside of stores, he said.