Best Buy Sticks With Turnaround Plan Despite Sales Decline

Company Will Continue to Move Marketing Dollars From TV to Digital

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Best Buy Co., the world's largest electronics chain, dropped the most in seven months after predicting that sales would continue shrinking for the rest of the year, dragged down by a lack of must-have new gadgets. according to the company.

But during first half, the company cut overall marketing spending by 26% and slashed TV spending.

Sales fell short of analysts' estimates in the period ended Aug. 2, declining 4 percent to $8.9 billion for a 10th straight quarterly drop. Same-store sales will decrease by a "low single digit" rate in the third and fourth quarter, Richfield, Minnesota-based Best Buy said today in a statement.

Chief Executive Officer Hubert Joly has made good on his promise to reduce expenses since arriving in September 2012, helping the stock more than triple last year. Since then, the shares have slipped as investors raised questions about whether he could execute the second part of his turnaround plan by reviving sales growth.

Part of that expense reduction has come on the marketing side, where the company has 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% to $116 million, compared to the first half of 2013, according to Kantar Media. During the same period, TV spending plummeted 69% 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.

Despite the sales decreases, Mr. Joly indicated that the company will give that strategy more time.

"We made progress in our evolution from analog and mass to digital and targeted communications with our customers," Mr. Joly said on the call. "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."

Athena, a data product unveiled earlier this year, is meant to be key to the company's turnaround and is meant to target customers based on past purchases, browse history, location and demographics.

At the same time, Best Buy's marketing team has been in flux the last two years. The retailer has not had a CMO since Barry Judge departed in May 2012. Scott Moore, senior VP-U.S. marketing reports to Scott Durchslag, president BestBuy.com and global e-commerce.

Industrywide problem
"Industrywide sales are continuing to decline in many of the consumer electronics categories in which we compete," Chief Financial Officer Sharon McCollam said in the statement. "Absent any change in these declining industry trends and with limited visibility to new product launch quantities, we continue to expect comparable sales to decline."

Best Buy dropped 6.1% to $30.19 at 10:20 a.m. in New York, for the biggest intraday decline since Jan. 17, when Best Buy posted a decline in holiday sales. The shares had fallen 20% this year through yesterday, compared with a 8.1% gain for the Standard & Poor's 500 Index.

Net income fell 45% to $146 million, or 42 cents a share, last quarter, from $266 million, or 77 cents, a year earlier, Best Buy said. Excluding some items, profit of 44 cents topped the 31-cent average of analysts' projections compiled by Bloomberg. 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.

Profit was helped by more cost reductions. Mr. 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.

The cost cutting "bodes well for future quarters once Best Buy sees higher demand from product innovation," Kate McShane, an analyst for Citigroup Inc. in New York, said in a note to clients. She recommends buying the shares.

Last May, Ms. McCollam said that "lack of innovation" was partly responsible for weakness in demand for consumer electronics, leading shoppers to wait longer to buy new phones, tablets and TVs.

Same-store sales
Best Buy reported today that same-store sales in the U.S. declined 2%, in line with the rest of the industry. Sales in the NPD-tracked consumer electronics categories -- from TVs to tablets and PCs -- declined 2.5%, Best Buy said.

When including international stores, Best Buy's same-store sales fell 2.7%. Analysts projected a drop of 2.2%, the average of 22 estimates, according to Consensus Metrix. Same-store sales, which at Best Buy include online revenue, are considered a key measure of a retailer's performance because new and closed stores are excluded.

Mr. Joly has 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 is "encouraged" by consumers' response to 4K TVs, although their impact will be limited this year, Mr. Joly said today. While prices are declining, they are still too high for the majority of shoppers, he said on a conference call with analysts. Best Buy sells 4K sets on its website ranging from $1,000 to $25,000.

Smartphones are reaching a saturation point with about 70% of U.S. consumers already owning one, Mr. Joly also said. That would limit the sales boost from any new device in the category, he said.

The chain "remained conservative" on its sales outlook for the year partly because it couldn't be sure how much inventory of a new product would be shipped, Ms. McCollam said on the call.

"We don't live on our wishes and hopes," Ms. McCollam said. "Based on industry data around these categories, it still doesn't paint a positive picture."

--Bloomberg News with contributions from Natalie Zmuda

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