Best Buy Tumbles After CEO Warns That Good Times May Not Last

  • Joly warns that the rosy results won’t be the new normal
  • Some products ‘inexorably’ moving to competitors, analyst says

Consumer Edge Analyst Says Best Buy Is Doing a Lot Right

Best Buy Co. suffered its worst stock decline in more than a year after Chief Executive Officer Hubert Joly warned that recent sales gains probably aren’t sustainable, renewing concerns that Amazon.com Inc. will threaten its business.

Comparable-store sales rose 5.4 percent last quarter, the company said Tuesday, fueled by demand for wearable devices and smart home systems. That was more than twice what analysts had predicted. Earnings also topped projections, and the company raised its outlook for full-year profit and sales.

Hubert Joly

Photographer: Scott Eells/Bloomberg

Yet, the question for investors is whether Best Buy can stay on that growth path in the face of mounting e-commerce competition. Joly cautioned on a conference call Tuesday that the second-quarter same-store sales gains are “not the new normal.”

“They are going to get perfect quarters like this every now and again,” said Brandon Fletcher, an analyst at Sanford C. Bernstein & Co. Best Buy “will continue to face waves of growth and decline, but its base products -- printer ink, headphones, etc. -- are not related to product launches and those sales are inexorably moving to Amazon and Wal-Mart online.”

Best Buy shares dropped as much as 9.1 percent to $56.76 in New York trading, the biggest intraday decline since January 2016. They had gained 46 percent this year through Monday’s close.

The nation’s biggest consumer electronics retailer got a boost last quarter from newer gadgets like Nintendo Co.’s Switch console and the Note 8 mobile phone from Samsung. Even so, Amazon began selling Kenmore appliances from Sears Holdings Corp. in recent months and introduced a service that helps customers set up smart home devices, two moves that could siphon business away from Best Buy.

Amazon Threat

A consumer survey from Gordon Haskett analyst Chuck Grom estimates that more than half of online sales traffic across 11 categories such as electronics and small appliances now goes to Amazon.

Best Buy, based in the Minneapolis area, isn’t alone in facing a growing threat from the online giant, which bulldozed into U.S. grocery stores this week with prices cuts across its newly purchased Whole Foods Market chain.

Whoops, Best Buy Forgot to Get Itself Killed by Amazon: Gadfly

The company’s gross profit margin for the first six months narrowed to 23.9 percent from 24.8 percent a year earlier, hurt by lower margins on gadgets like wearable devices, Chief Financial Officer Corie Barry said on a call with investors.

Best Buy now expects full-year revenue growth of 4 percent, up from 2.5 percent previously, while operating income should increase 4 percent to 9 percent, also higher than its earlier forecast. Computers, phones and appliances helped fuel the revenue gain in the summer period -- the company’s best results for same-store sales since the fourth quarter of fiscal 2010 -- while demand for tablets declined again.

The updated outlook reflects “continued positive industry and consumer momentum, coupled with the impact of product launches,” Barry said in a statement.

Best Buy’s same store sales growth last quarter was more than double the 2.1 percent seen by analysts, according to Consensus Metrix. The company also generated the most revenue from online sales outside of a holiday quarter, with growth in that channel up 31 percent, reflecting a shift in consumer spending habits.

Excluding some items, Best Buy posted profit of 69 cents a share in its second quarter, which ended July 29, topping the 63-cent average of analysts’ estimates. Sales of $8.94 billion exceeded the $8.66 billion projection.

Speaking about the coming holiday season, Barry said it’s far too early to predict the outcome.

“You can’t always carry trends forward into the fourth quarter,” she said on the call. The period is generally rife with discounts and promotions and “there are still a lot of unknowns.”

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