Best Buy Co. plunged the most in more than 11 years after saying U.S. same-store sales fell in the holiday shopping season as price cuts failed to draw as many shoppers as expected.
The shares slid 28 percent to $26.95 at 9:53 a.m. in New York and earlier plummeted as much as 31 percent for the biggest intraday decline since August 2002. Domestic sales at locations open at least 14 months and on the Web fell 0.9 percent in the nine weeks ended Jan. 4, the Minneapolis-based chain said in a statement. Discounts led to lower-than-expected operating profit, the retailer said.
Chief Executive Officer Hubert Joly, in a bid to stop customers from defecting to online rivals such as Amazon.com Inc., has piled on discounts and made permanent a policy of matching competitors’ prices to cut down on the practice known as “showrooming,” when shoppers use Best Buy stores to scout products they later buy online elsewhere. He also has trimmed costs and is relying more on sales of mobile devices.
“Their initiatives are not driving traffic,” Michael Pachter, an analyst with Wedbush Securities in Los Angeles who rates the shares underperform, said in an e-mail. “They are positioned as if competition will go away, and it won’t. The Internet never sleeps.”
The fourth-quarter operating income rate, excluding certain items, will be 175 to 185 basis points lower than last year, Best Buy said. Total revenue declined 2.6 percent to $11.5 billion in the holiday period while domestic sales dropped 1.5 percent. One bright spot was U.S. comparable sales online, which jumped 24 percent.
Joly, who took over as CEO in September 2012, instituted a policy of matching Internet competitors’ prices during his first holiday season at the helm. The move halted a decline in sales at the time, and Joly made the program permanent. In November, Best Buy vowed to keep pace with rivals’ discounts and said doing so would hurt profitability.
The matching policy and price cuts have eliminated the threat posed by showrooming, Joly said today in an interview. Instead of losing purchases when a shopper in a store realizes there is a better offer from a competitor, Best Buy is keeping those sales, he said.
“We have transformed what people thought was a huge liability into a huge asset,” Joly said. “If prices are competitive, there is no reason to go anywhere else.”
Joly attributed much of the sales decline to a lackluster December when demand for consumer electronics fell industrywide. A lack of new products in the mobile-phone category also failed to excite shoppers, he said on a conference call with analysts.
While the discounts narrowed profit margins, Best Buy will continue the practice, Joly said. The chain is dedicated to taking price considerations out of the buying equation for shoppers and winning sales with a better customer experience, he said.
“This was a bump in the road,” Joly said. “The ability to drive performance in this industry is still intact.”
Best Buy also will continue cutting costs and now expects to trim more than its previous target of $725 million in annual expenses. The retailer said that it has a lot of work to do in improving the personalization of its online marketing to catch up to competitors such as Amazon.
Best Buy can’t boost profitability through cost cuts alone, said Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis.
‘You have to drive traffic and you have to do that profitably,’’ he said in a telephone interview. “It’s a commodity business. The worst part is that the commodity is being wrecked by a big competitor called Amazon.”
Chains from Lululemon Athletica Inc. to Family Dollar Stores Inc. have cut profit forecasts this year after a disappointing holiday period. Best Buy slid 5.8 percent this year through yesterday after more than tripling in 2013.
Best Buy founder Richard Schulze, who last year was named chairman emeritus after ending an attempt to acquire the company, said today that he is confident in the retailer’s management.
“Best Buy is on this journey and in this business to win, acquire, and retain new and existing customers,” Schulze said today in a statement. “I have complete faith in the long-term strategy.”