Lower sales, lower stock price add up to lousy day for Best Buy

On a day when the government reported overall retail sales were better than expected, Best Buy had to confess its own results came up short.

Disappointing sales of TVs, notebook computers and video games dragged down Best Buy's third-quarter sales and profit. And that sent the consumer electronics retailer's stock tumbling 15 percent.

Best Buy's quarterly net income fell about 4 percent to $217 million for the three months ending November 27. Sales at stores open at least 14 months -- a key benchmark -- dropped 5 percent.

Best Buy's disappointing sales and earnings report came as overall retail sales for the nation rose nearly 1 percent in November. That was the fifth straight monthly increase and it's raising hopes that consumers will boost the economy in coming months.

But the news from Best Buy wasn't good. The big flat-panel TVs that are such a big part of its business are not a big item on consumers' shopping lists.

"Estimates show that the TV market was down double digits in value terms in the third quarter," said CEO Brian Dunn. "We think this was driven by a weaker overall demand environment for TVs, along with slower adoption of new technologies."

Dunn said some competitors have been selling lower-quality TVs below cost. Meanwhile, he said there's not widespread interest so far in the pricey TVs Best Buy has been pushing -- such as those that show 3D or get content from the Internet.

"It's hurting Best Buy significantly more than the others, because that's what they do. ... live and die by consumer electronics."

Dunn said notebook computer sales were weak, as consumer migrate to tablet computers -- or think about making that move. Sales of some new video games have also been surprisingly slow.

But Dunn insisted Best Buy will be a dominant player in those markets as consumers adopt new technologies. He said Best Buy's efforts to push smartphones will make it a leader in that arena, too.

Analysts aren't so sure about Best Buy's future. They note the Richfield company faces increasing competition from Target, Walmart, Amazon.com and other brick-and-mortar and online retailers that sell consumers electronics for lower prices, especially big-screen flat-panel TVs.

"They're everywhere. I saw grocery stores using them as their doorbuster item this year," said R.J. Hottovy, a retail analyst with Morningstar.

He said many consumers are satisfied with the prices and limited selection of consumer electronics they find at Best Buy competitors.

"It gives consumers less of an incentive to visit specialty stores like Best Buy. So, Best Buy has to do something really to stand out in this environment," he said.

But Hottovy doesn't see Best Buy distinguishing itself right now with any product line that really matters to consumers.

"The categories that you need to be in -- Best Buy just doesn't have enough of a competitive positioning to really make it stand out," said Hottovy. "Tablet computing, smartphones -- Best Buy has done an OK job building out its assortment there. But I have worries about where it goes from here."

Hottovy wonders if wireless carriers will beef up their own network of stores, eroding Best Buy's booming mobile phone business.

Thrivent Financial for Lutherans retail analyst Dave Heupel says Best Buy is too focused on Windows-based computers and devices, when consumers are increasingly interested in Apple products.

"They just don't have the kind of dominant presence, as it relates to the Apple side of the equation, as they do in the other areas," said Heupel. "As more of that business shifts away toward the Apple products, it's just somewhat of a drag for a Best Buy."

But Heupel said Best Buy's big problem is its intense focus on consumer electronics, which are hardly must-haves in a bad economy.

"The segment right now is somewhat cooling off, given the product cycle we're in, the economy we're in," said Heupel. "It's hurting Best Buy significantly more than the others, because that's what they do. And you can't run and hide in apparel or anywhere else, because you live and die by consumer electronics. Right now, it's a tough environment."

Best Buy says it's taking several steps to boost sales this month. The list includes selling the Apple iPad on its website for home delivery; extending store hours; lowering the minimum purchase requirement for financing deals; and offering free smartphones every day until Christmas.

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