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A Best Buy store in Westminster, Colorado June 27, 2007.
Credit: Reuters/Rick Wilking
By Dhanya Skariachan
Thu Mar 29, 2012 11:39am EDT
(Reuters) - Best Buy Co posted weaker-than-expected sales for the key holiday quarter and said it would close 50 large U.S. stores, sending shares of the world's largest consumer electronics chain down 9 percent on Thursday.
Analysts and investors expected more aggressive restructuring efforts from the chain, whose large-format stores have often been termed "white elephants."
While most industry insiders welcomed Best Buy's decision to reduce its retail footprint at a time when many shoppers buy their gadgets online, they expected the retailer would have done more.
"These are steps in the right direction," BB&T Capital Markets analyst Anthony Chukumba said. "Beyond the weak (sales), I think what the market is telling you is that they don't think they went far enough from a restructuring perspective."
Best Buy should try to relocate more stores to smaller locations, sub-lease portions of their bigger stores and shutter more unprofitable stores, he said.
"Clearly, Best Buy doesn't need as much U.S. big box square footage as they currently have," Chukumba added.
In addition to closing 50 big stores, the company said it would cut 400 jobs in corporate and support areas.
THE FIGHT IS ON
Despite offering bigger discounts and free shipping to lure shoppers from its rivals including Wal-Mart Stores Inc and Amazon.com Inc, Best Buy's same-store sales fell 2.4 percent in the quarter, including a 2.2 percent decline at its U.S. stores open at least 14 months.
Wedbush analyst Michael Pachter was looking for a 1.8 percent same-store sales decline in the quarter, including a 1.4 percent decline at its domestic stores.
Its sales rose to $16.63 billion, but fell far short of the analysts' average estimate of $17.23 billion, according to Thomson Reuters I/B/E/S.
Unlike the 2010 holiday season, when Best Buy held the line on discounts and promoted only expensive goods, this time around it offered deep discounts on everything from flat-screen TVs to digital cameras. It also promised to match any lower prices that its brick-and-mortar competitors advertised during the season's peak and offered free online shipping.
Still, industry watchers contend that Best Buy stores increasingly serve as physical showrooms for online retailers.
Amazon enjoys its largest pricing advantage versus brick-and-mortar rivals in the consumer electronics segment, with prices 17 percent lower on average, BB&T's Chukumba has estimated.
"We remain concerned about the sustainability of Best Buy's big-box model. The company is gradually becoming a physical showroom for online retailers, and the prevalence of smartphones makes comparison shopping increasingly easy," Pachter said.
Best Buy lost $1.7 billion, or $4.89 a share, in the fourth quarter that ended March 3, compared with net income of $651 million, or $1.62 a share, a year earlier.
Excluding charges, it earned $2.47 a share. Analysts were looking for a profit of $2.16 a share on that basis, according to Thomson Reuters I/B/E/S.
THE SMALLER THE BETTER
Best Buy is now trying to focus on its smaller format stores. It will close 50 U.S. big-box stores and open 100 Best Buy small-format, stand-alone stores in the current fiscal 2013.
The chain expects its restructuring to save about $800 million by fiscal 2015, including about $250 million this year.
The changes should help lower the retailer's overall cost structure, Chief Executive Brian Dunn said in a statement.
Best Buy plans to invest some of the savings into improving customer service, including expanding its Reward Zone Silver loyalty program, and giving store employees more training before the next holiday season.
It will also offer competitive prices as part of its push to drive revenue, and over time, some of the savings should fall to the bottom line, Dunn said.
For the current financial year, Best Buy sees earnings of $3.50 to $3.80 a share, before items.
(Reporting By Dhanya Skariachan; Editing by Gerald E. McCormick, Maureen Bavdek, Dave Zimmerman)
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