Wonky Replacement Cycles Nervous Consumers Hurt Best Buy Sales

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Wonky Replacement Cycles, Nervous Consumers Hurt Best Buy Sales

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While Best Buy’s latest financial performance topped expectations, it faces several challenges and lowered its forecast for the full year.

Some of the softness, it says, is due to an increasingly worried consumer cutting back on discretionary spending -- and those concerns are crimping sales at all kinds of retailers. But while other chains have (mostly) shaken off many of their pandemic problems, Best Buy can’t: COVID-19 threw the “normal” purchase cycle for electronics off as people pulled purchases forward. And while Best Buy is confident that trend will correct itself as consumers begin to upgrade, the timing for when that will happen is unclear.

The Minneapolis-based retailer says second-quarter comparable sales slipped 6.2%, and total revenue declined to $9.58 billion from $10.33 billion in the second quarter of 2022. In the U.S., sales fell 7.1% to $8.89 billion. Online sales also dropped 7%. Net income was $274 million, compared to $304 million in the year-ago period.

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The largest declines came in appliances, home theater, computing and mobile phones, while gaming was a strong point.

“Our financial results were better than expected, and they reflect a consumer electronics industry that remains challenged due to the pull-forward of demand in prior years and the various macroeconomic factors that we are all too familiar with,” said Corie Barry, Best Buy chief executive officer, in the earnings announcement. “With that said, we continue to expect that this year will be the low point in tech demand after two years of sales declines. Next year, the consumer electronics industry should see stabilization and possibly growth driven by the natural upgrade and replacement cycles and the normalization of tech innovation.”

The company is lowering expectations for the year and predicts sales will fall between 4.5% and 6%.

In his note on Best Buy’s earnings, Sean Dunlop, an analyst who follows Best Buy for Morningstar, called the company’s results solid. But citing “a murky near-term industry environment and sluggish industry sales,” he trimmed his projection of the company’s growth trajectory. He now expects its 10-year cumulative annual growth rates in revenue to be just 1.1%, down from 1.3%.

“In a competitive industry with a high degree of customer price sensitivity, infrequent purchase occasions, and nearly perfect price comparison, we believe Best Buy will struggle to generate sales growth ahead of inflation in hourly labor and store rental costs,” he says.

He also notes that profit-sharing in the company's co-branded credit card business will likely decline for the remainder of the year and into the next.

Seth Basham, an analyst who follows Best Buy for Wedbush, has similar concerns. “All in, we commend Best Buy for its progress year-to-date in navigating the current environment,” he writes. “But with the story still primarily dependent on the uncertain macro outlook, product innovation and replacement cycles that have not yet turned,” he remains neutral on the company’s outlook.

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August 30, 2023 at 03:05PM