Best Buy Has $81 Million First-Quarter Loss on Price Cuts

Best Buy Co., the world’s largest consumer-electronics retailer, posted an $81 million first-quarter net loss as the company lowers prices to compete with online rivals.

The loss of 24 cents a share in the quarter ended May 4 compares with net income of $158 million, or 46 cents, a year earlier, the Richfield, Minnesota-based company said today in a statement. Sales by stores at least 14 months fell 1.3 percent.

Chief Executive Officer Hubert Joly, hired in August to turn Best Buy around, made permanent its holiday policy of matching Internet competitors’ prices to win back sales from Inc. That contributed to the company’s gross margin - - the portion of sales left after subtracting the cost of goods sold -- shrinking about 1.8 percentage points to 23.1 percent. Analysts projected 24.3 percent.

“The magnitude of the gross margin decline is likely to give investors pause around the pace of the overhaul,” Colin McGranahan, an analyst at Sanford C. Bernstein & Co. in New York, wrote today in a note. He rates Best Buy market perform, the equivalent of a hold.

Best Buy slipped 4.4 percent to $25.64 at the close in New York. The shares have more than doubled this year, the second-best performance in the Standard & Poor’s 500 Index behind Netflix Inc.

Joly Plans

When Joly took over in September, Best Buy was resisting a takeover bid by founder Richard Schulze and was headed for its first-ever annual revenue decline. Analysts project another two years of falling sales, signaling Joly, 53, has yet to prove the retailer won’t lose relevance as consumers evaluate goods at stores and go online to buy them cheaper.

“For all of Best Buy’s attractiveness, it’s speculative,” said Jerry Bruni, who manages about 337,000 Best Buy shares as founder and chief investment officer of J.V. Bruni & Co. in Colorado Springs, Colorado. “They are making all the right steps. But it’s really early in the game in terms of an operational turnaround.”

Best Buy cut $175 million in expenses in the quarter, in part by eliminating workers across the company, Matt Furman, a spokesman, said today by telephone. He declined to specify the number of job cuts and said store employees weren’t among the reductions. The company trimmed costs by $150 million in the previous quarter.

Excluding the company’s discontinued European operations, restructuring charges and asset impairments, Best Buy had a first-quarter profit of 32 cents a share. Analysts projected 24 cents, the average of 23 estimates in a Bloomberg survey.

Chinese Stores

After hiring Meng Zhou as CEO of its Five Star appliance and electronics chain in China, Best Buy plans to improve its stores and online and digital operations, Joly said today in a telephone interview.

“The question of staying or going is not on the table,” Joly said, referring to China. “We are going to watch. We have more than 200 stores in China. It happens to be the fastest-growing electronics market in the whole world.”

Best Buy doesn’t plan to sell its Canadian stores, either, Joly said.

Last year, Best Buy halted the expansion of test stores dressed up with skylights and other improvements after Joly concluded they weren’t delivering enough sales to justify the costs, he told reporters last month in New York. Instead, he made less-expensive changes in existing stores, giving more space to the biggest sellers such as smartphones, tablets, appliances and accessories.

Carphone Sale

The company announced last month it agreed to sell its 50-percent stake in a joint venture selling mobile phones in Europe with Carphone Warehouse Plc.

Best Buy shares hit a 12-year closing low of $11.29 on Dec. 28, capping the fourth annual decline in the previous five years. Then the shares began rebounding as holiday sales stabilized with discounts on smartphones and the price-matching policy.

Schulze, who owns 20 percent of Best Buy, failed in his takeover bid in February. A month later, he returned to the board as chairman emeritus, with an office for life, regular meetings with Joly and a requirement to notify the CEO when he plans to visit the office.

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