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Best Buy looks to new products to push sales

Minneapolis News
27 Aug 2014, 11:14 GMT+10

MINNEAPOLIS, Mn. - Best Buy Co Inc, the largest U.S. specialty retailer of consumer electronics, Tuesday reported a 4 percent dip in quarterly sales to $8.9 billion the 10th straight quarterly drop, while announcing plans to stick to ongoing restructuring.

Hit by an increasing shift to online shopping, Minneapolis-based Best Buy reported lower-than-expected revenue for the third straight quarter, as fewer people bought PCs and electronics. The same store sales are expected to decrease by a "low single digit" rate in the third and fourth quarter, Richfield, Minnesota-based Best Buy said in a statement

The company said same-store sales overall fell 2.7 percent in the second quarter ended Aug. 2, more than the 2.2 percent decline estimated by analysts polled by research firm Consensus Metrix. In the U.S. same-store sales slipped 2 percent.

Chief Executive Officer Hubert Joly on the call said: "We made progress in our evolution from analog and mass to digital and targeted communications with our customers. During the quarter we continued to shift our marketing investment dollars towards digital-media campaigns and away from print and television advertising.

"We are also leveraging our Athena customer database to pilot new targeted email campaigns. We are in the early stages of being able to personalize marketing messages to individual customers, which we view as a two or three year journey."

During the quarter, the company which has 1,400 stores, made a concerted effort to shift the marketing budget from expensive TV and print and into more digital and targeted marketing.

In the first half of 2014, overall measured media spending fell 26 percent to $116 million, compared to the first half of 2013, according to Kantar Media.

During the same period, TV spending plummeted 69 percent to just $17 million -- a surprisingly low figure for a marketer that last year ranked as the nation's 65th largest advertising spender, according to the Ad Age DataCenter.

The company reported a 45 percent drop in net income to $146 million, or 42 cents a share, last quarter, from $266 million, or 77 cents, a year earlier.

The year-ago profit included a gain of $229 million from legal settlements.

Excluding items, the company earned 44 cents per share from continuing operations, while analysts' had estimated 31 cents.

That marked the sixth straight time the company topped estimates. A year earlier, profit excluding a one-time gain from a lawsuit settlement was $112 million, or 32 cents.

The profit was helped by more cost reductions. Joly has set a goal of trimming $1 billion in annual expenses through several initiatives, including improving the supply chain and negotiating cheaper store leases. Best Buy cut $40 million in annual costs last quarter, bringing the total to $900 million.

Best Buy said operating margins were likely to remain under pressure due to higher sales of lower-margin items, overall industry softness and discounting in Canada and China.

"... Industry-wide sales are continuing to decline in many of the consumer electronics categories in which we compete," Chief Financial Officer Sharon McCollam said in a statement.

Sales of consumer electronics such as TVs and desktop and notebook computers fell 2.5 percent industrywide in the quarter, the company said, citing NPD Group's Weekly Tracking Service. Such items make up about 65 percent of Best Buy's U.S. revenue.

Joly said he's counting on the latest devices from Apple Inc. and 4K televisions, which have four times the resolution of current displays, to help. Apple is expected to introduce new iPhones next month while Samsung Electronics Co. and Sony Corp. are pushing 4K within revamped Best Buy home theater departments.

Best Buy said it expected continued softness in mobile phone sales ahead of the "highly-anticipated" release of new models.

The company saw encouraging customer response to 4K televisions, but their impact on sales would be "relatively limited" this year, Joly said on a conference call.

Best Buy said it plans to invest $40 million-$50 million in the second half to improve operations such as shipping and order fulfillment.

"We see the margin guides as conservative," JP Morgan analyst Christopher Horvers wrote in a note, adding the company could benefit from the anticipated iPhone launch and sales of ultra high-definition 4K televisions.

Joly has removed layers of management, eliminated hundreds of jobs, shut down unprofitable stores and boosted Best Buy's cash reserves since 2012 in an effort to make up for declining sales.

Best Buy's shares were trading down 4.8 percent at $30.46. Up to Monday's close, the stock had fallen 20 percent since the start of the year.

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