• Investors sour on Joly's turnaround in weak electronics market
  • Retailer generates more than half its profit in fourth quarter

Best Buy Co. needs a very merry Christmas.

Heading into the holidays, the company’s stock is down 22 percent this year and it has the worst valuation based on future earnings of any large U.S. retailer. Though Chief Executive Officer Hubert Joly has earned plaudits for cutting costs, selling off foreign divisions and revamping stores, investors are spooked by memories of Christmases past, when disappointing results rocked the world’s largest electronics chain.

Impressing Wall Street will be especially difficult this time around for Best Buy, which generates more than half its profit in the fourth quarter. There was widespread retail weakness, including in electronics, heading into the holidays. And the critical Black Friday weekend after Thanksgiving was dismal for brick-and-mortar chains, where in-store purchases declined an estimated 10 percent as online buying surged, according to ShopperTrak.

“There’s a lot at risk if the consumer doesn’t show up,” said Bradley Thomas, an analyst at Keybanc Capital Markets.

Another lackluster holiday season for the chain of 1,600-plus stores would only raise more doubts about whether the industry leader can ever regain its luster. Complicating Joly’s mission are two hurdles mostly beyond his control. Best Buy relies more on the holidays -- when huge discounting hurts profits -- than many retailers. It also needs the technology industry to keep producing massive hits like the tablet, a feat that’s proved hard to repeat. And even hot new gadgets aren’t necessarily a panacea: They can sap demand for once-vibrant categories, as the smartphone did to digital cameras.

On Sidelines

“They’ve done an admirable job with the aspects of the business that are really in their control,” said Thomas, who has the equivalent of a hold on Best Buy’s shares. “There are still questions about the health of the industry that keep a lot of investors on the sidelines.”

Joly, 56, is in the unenviable position of being measured by the last two months of the year. Apparel chains have the back-to-school period. Home Depot Inc.’s biggest season is spring. For Best Buy, it’s the fourth quarter, which accounts for 35 percent of its sales. That’s fourth highest among retailers in the Standard & Poor’s 500 Index and more than Macy’s Inc., Amazon.com Inc. and Tiffany & Co.

Best Buy declined to make Joly available for an interview. In a statement, the Richfield, Minnesota-based company said its focus on services in areas like home theater will boost revenue at other times of the year.

With 52 percent of Best Buy’s earnings expected to come in the fourth quarter, Wall Street will be watching. It’s a period that’s battered the chain often. After same-store sales fell during the 2013 holidays, shares sank by a third in two days. The stock also took a hit after the 2011 Christmas season when revenue trailed estimates, raising doubts about then-CEO Brian Dunn, who was later ousted.

Tough Choice

Discounting during Christmas by Amazon and other competitors leaves Best Buy with a tough choice: offer more discounts or protect margins and miss out on revenue. Joly and Chief Financial Officer Sharon McCollam have done both with mixed results. The company poured on the deals in 2013 but sales still declined and the stock tumbled. Last year, it reduced promotions and boosted revenue. Yet the shares fell anyway because the company gave a disappointing forecast for the the first half of 2015.

This year, Best Buy will be more measured with discounts. But Joly also is betting that the work his team has done on improving service will pay off. A hotel industry veteran, he has focused on customer experience, including making the chain’s stores and website easier to shop. He sees Best Buy as not just a store, but as an electronics expert for the masses.

Physical Space

While all specialty chains pitch expertise as a selling point, the availability of online information has diluted that advantage. Even so, Joly says Americans still want a physical place to check out big-ticket products like laptops and televisions and talk to knowledgeable staff.

“The customer experience we provide is massively better,” Joly said last month on a conference call. “We’re seeing more expertise, better experience resulting in market-share gains.”

There’s no doubt Joly has stabilized the company. Before he arrived, the chain was in free fall. Dunn was forced out after a relationship with an employee became public. Then founder and Chairman Richard Schulze quit.

Buy Recommendations

Analysts remain supportive, with more than half recommending buying Best Buy’s stock. They estimate the shares will trade at about $39 in a year, 28 percent above Wednesday’s closing price.

Still, the company said last month that its U.S. sales would be “near flat” this quarter amid waning demand. Smartwatches are a bright spot, but they’re considered too much of a niche product to ignite the industry. This is also supposed to be the year that 4K high-definition televisions go mainstream as prices come down, but there are doubts because consumers remain glued to their tablets and smartphones. Even with 4K, the U.S. television market is expected to be little changed this year, according Stephen Baker, an analyst for NPD Group.

“You need something the equivalent of the smartphone to come out to change the market,” said Baker, who expects U.S. electronics sales to be stable or even a little worse in 2016. He said there’s no doubt that Best Buy is held back by the industry’s weakness. But that may be beside the point.

“You have to play with the dance you’re in,” he said.

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