Shoppers ignored Best Buy Co Inc’s promotion of pricey 3D televisions and other high-end gadgets this holiday season as they chased bargains elsewhere, hammering the company’s profits.
The top electronics chain, seen as a bellwether in consumer electronics, surprised investors by reporting a drop in quarterly sales at existing stores and lower-than-expected earnings on Tuesday as demand for top-of-the-line televisions plunged. Its shares tumbled 14.8 percent.
The dismal report also pressured the shares of competitors such as RadioShack Corp and GameStop Corp, television manufacturers such as Sony Corp and television components makers such as Corning Inc, and raised concerns about holiday demand for gadgets.
“The newer technologies, like 3D and IPTV (Internet Protocol TV), which we assort more broadly than anyone, have been slower to take hold,” Best Buy Chief Executive Brian Dunn said on a conference call.
(Phil Lelyveld insertion: see this story for an alternative explanation.)
The lackluster showing also cast a shadow over the strength of the recovery in the consumer-driven U.S. economy, in contrast to better-than-expected November retail sales reported by the U.S. Commerce Department on Tuesday. Shoppers told Reuters this week they were buying more, but focusing on simpler merchandise such as sweaters.
But later on Tuesday, the Federal Reserve said the U.S. economic recovery was still too feeble to cut unemployment, highlighting the fragile nature of the economy.
“Best Buy did not go deep enough discounting in TVs on Black Friday, likely the result of their desire to protect gross margins. We believe the mass merchants, particularly Target , were the incremental share gainers this year,” Janney Capital markets analyst David Strasser said.
Cliff Draughn, president & chief investment officer at Excelsia Investment Advisors in Savannah, Georgia, said: “So the consumer this Christmas may be buying more and boosting a little bit in the retail side. The big ticket items, like the flat-screen TVs, the stereo systems — it’s not there. They can’t afford those types of items.
“The television that sold for $5,000 three years ago sells for $1,500 today — how many people need four flat-screen televisions in their apartment?”
Best Buy said it is now changing tack, promoting lower-priced 32-inch TVs in December and making price adjustments in its computer section after realizing “the consumer is definitely showing propensity at the low end.”
“I think the U.S. consumer is carefully considering his or her wallet and what they are going to buy for their holiday gift-giving,” Dunn told Reuters in an interview, adding he expects sales volumes to be “enormous” in the 10 days before and after Christmas.
Following Best Buy’s disappointing earnings, Reuters analyst John Kozey does not like Best Buy as an investment and says shares could fall further in the near term.
“Best Buy is a stock to be traded, not invested in the long run,” Kozey said.
BLEEDING MARKET SHARE
In its second holiday season after the bankruptcy of archrival Circuit City, Best Buy faces stiff competition from online retailer Amazon.com Inc and discounters such as Wal-Mart Stores Inc and Target Corp.
Best Buy also said its U.S. market share fell 1.1 percentage points in the quarter on weaker-than-expected sales of TVs, laptops and video games. It blamed some of those losses on a decision to shift away from promoting lower-priced goods, then seeing shoppers gravitate to those brands anyway.
For fiscal 2011, Best Buy cut its profit per share forecast to about $3.20 to $3.40 a prior view of $3.55 to $3.70.
In the fiscal third quarter that ended November 27, net profit was $217 million, or 54 cents a share, compared with $227 million, or 53 cents a share, a year earlier. Analysts on average had forecast 61 cents a share, according to Thomson Reuters I/B/E/S.
Sales fell 1 percent to $11.89 billion, missing analysts’ average estimate of $12.45 billion. Domestic comparable-store sales declined 5 percent.
Best Buy shares closed down $6.18 at $35.52 on the New York Stock Exchange.
See the full story here: http://www.reuters.com/article/idUSTRE6BD65E20101215
——–
Fancy new features like 3D screens and Internet connectivity have failed to inspire U.S. television shoppers, dashing a hoped-for recovery in the global consumer electronics industry.
Manufacturers such as Sony Corp, Samsung Electronics Co Ltd and Sharp Corp are learning that features such as razor-thin LED TVs are just not enough for television sales to stage a comeback in the United States.
On Tuesday, Best Buy Co Inc Chief Executive Brian Dunn told analysts that sales of 3D TVs had fallen behind industry expectations.
“There was confusion about 3D early (on),” Dunn said. “It was a little short on content.”
The largest U.S. electronics chain cut its full-year profit forecast, and its disappointing results put pressure on shares of Best Buy and other electronics companies.
“The stock got killed today,” said Frank Ingarra, a co-portfolio manager of Hennessy Funds, which holds 32,000 shares of Best Buy. The retailer’s shares dropped nearly 15 percent on Tuesday to close at $35.52.
Despite a better-than-expected performance by U.S. retailers in November, consumers are holding off on big-ticket purchases like TVs with the latest bells and whistles.
Consumer electronics executives say TV sales will improve once more 3D content becomes available next year and when consumers start recording their own content on 3D-enabled camcorders.
“Just like how high-definition TV started in sports and movies, as 3D evolves, it will go with sports and movies and then become more of an everyday thing,” Jay Vandenbree, head of home entertainment at LG Electronics USA, said in an interview.
ROAD BLOCKS
For now, investors are demanding to know why retailers aggressively pushed a new generation of TVs after many consumers had just upgraded to their first flat-screen sets this year.
“People don’t understand the added benefit of 3D,” Ingarra said. “When you get into $2,000 TVs, you start thinking: ‘At what point do I really need this, and is it going to make my viewing experience that much better?'”
Consumers are also put off by the need to purchase expensive 3D glasses to go along with the new TVs, said NPD analyst Ross Rubin. The picture quality of some shows produced in 3D has also made some viewers queasy.
“If the 3D content hasn’t been produced well — if it has been aggressive on certain kinds of effects — that can result in discomfort for viewers,” Rubin said.
This holiday, consumers are more interested in buying TVs with bigger screens, rather than pricier ones with more features, Rubin said.
Sales of TVs with Google Inc’s Google TV software, which lets viewers surf the Web directly from TV sets, were also hurt as consumers realized they could find the same services, like movie service Netflix Inc, elsewhere.
“People can also buy lower-priced alternatives to connected TVs, be it video game players, Blu-ray players or Apple TV.”
Read full story here: http://www.reuters.com/article/idUSTRE6BD51T20101214