Best Buy CEO Tempers IPhone Excitement

Best Buy Co.’s message to investors is simple: Don’t get too excited about the next iPhone.

Throughout this year, the world’s largest electronics retailer blamed its prolonged sales slump on a lack of must-have gadgets, particularly phones. Chief Executive Officer Hubert Joly said in February that new devices from Apple Inc. could help the business. With the release of the iPhone 6 said to be just two weeks away, Joly is now tempering those expectations.

Without specifically naming the iPhone 6, Joly said on a conference call today that he doesn’t expect a “huge lift” from phones released this year because so many consumers already have them and Best Buy is uncertain about how much inventory it will get. That was part of the retailer’s explanation for why it forecast same-store sales to decline for the rest of this year.

“Whenever our vendors release new products there is always the potential for a lot of excitement,” Joly said today in an interview. “What we wanted to call out for the market is the fact that the impact on phones is questionable. Expecting the same kind of growth would not be appropriate.”

Best Buy dropped 6.9 percent to $29.80 at the close in New York for the largest decline since Jan. 17, when Best Buy posted a decline in holiday sales. The stock has slumped 25 percent this year, compared with a 8.2 percent gain for the Standard & Poor’s 500 Index.

4K Television

Joly also lessened enthusiasm for what 4K television could mean for the chain this year: while prices are declining, they are still too expensive for most consumers. Earlier this year, he had called out the technology, which offers screen resolutions four times current sets, as a bright spot in the lackluster consumer electronics industry.

The company went as far as to revamp the home theater sections for the Samsung Electronics Co. and Sony Corp. brands in about half its stores last quarter with a focus on 4K, which is also called ultra high-definition and has only been on the market for a couple of years. Best Buy sells 4K sets on its website ranging from $1,000 to $25,000.

“We don’t want the investors to get overly excited,” Joly said. “We see this strategically as a very exciting opportunity. But the impact this year will still be relatively limited. It’s still going to be for the early adopters.”

Same-store sales will decrease by a “low single digit” rate in the third and fourth quarter, Richfield, Minnesota-based Best Buy said today in a statement reporting second-quarter results. Analysts projected a drop of 1.7 percent in the third quarter and 0.3 percent in the fourth, according to 12 estimates compiled by Bloomberg.

’Very Conservative’

The chain remained “very conservative” on its second-half sales outlook because “we don’t live on our wishes and hopes,” Chief Financial Officer Sharon McCollam said today on the conference call. “Based on industry data around these categories, it still doesn’t paint a positive picture.”

Second-quarter sales also fell short of analysts’ estimates in the period ended Aug. 2, declining 4 percent to $8.9 billion, a sixth straight quarterly drop.

For the third quarter in a row, Best Buy pointed to third-party data showing that U.S. sales in many categories of electronics declined more than its own. Best Buy’s U.S. same-store sales declined 2 percent while according to NPD Group Inc. industrywide revenue in the U.S. fell 2.5 percent.

When including international stores, Best Buy’s same-store sales fell 2.7 percent. Analysts projected a drop of 2.2 percent, the average of 22 estimates, according to Consensus Metrix. Same-store sales, which at Best Buy include online revenue, are considered a key measure of a retailer’s performance because new and closed stores are excluded.

Profit Surprises

While sales growth remained elusive, Joly continued to make good on his promise to reduce expenses since arriving in September 2012. He’s given a target of $1 billion in annual cost reductions and the chain cut $40 million more last quarter, bringing the total to $900 million.

That lifted profits as the company’s earnings per share topped analysts’ estimates for the sixth straight quarter. Excluding some items, profit of 44 cents surpassed the 31-cent average of analysts’ projections compiled by Bloomberg.

The cost cutting “bodes well for future quarters once Best Buy sees higher demand from product innovation,” Kate McShane, an analyst for Citigroup Inc. in New York, said in a note to clients. She recommends buying the shares.

The company also reiterated its long-term goal to reach an operating margin of at least 5 percent. Last quarter it was 2.9 percent. Getting back to that level depends on continued cost reductions and returning to same-store sales growth at a “low-single digit” percentage, the company said.

“Today’s results echoed previous quarters, with a lot of the impressive cost cutting the company has done being overshadowed by the continued top-line pressures,” said R.J. Hottovy, a Chicago-based analyst at Morningstar Inc., who recommends holding Best Buy shares. The pullback on expectations for the iPhone and 4K is “definitely a concern.”

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