Here’s Why Best Buy’s Third Quarter Was Worse Than Expected

With company founder Richard Schulze preparing his buyback plan, analysts have been wondering how depressed Best Buy’s (NYSE:BBY) third-quarter results would be for weeks. In the month leading up to Tuesday’s earnings report, analysts’ estimates dropped from 36 cents a share to 12 cents per share, and on August 21 the company suspended its earnings guidance for the quarter because of its “low expectations for industry wide sales.”

Best Buy reported third-quarter results on Tuesday that showed how severe the retailer’s problems have become. Despite chief executive Hubert Joly’s attempts to turnaround the company, Best Buy swung to a loss in the third quarter as customers increasingly choose Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT) for their electronics purchases.

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For the three-month period ended on November 3, the company’s loss was $10 million, or 3 cents per share, missing analysts already-lowered expectations. In comparison, Best Buy reported a profit of $156 million, or 42 cents per share, in the year-ago quarter.

“They said they were going to produce lousy results and they didn’t disappoint — they produced lousy results,” said University of Michigan business and law professor Erik Gordon to Bloomberg. “It gives the Schulze gang ammo to say Best Buy is lost.”

A significant drop in same-store sales contributed heavily to Best Buy’s poor results, giving support to Joly’s claim that the company must boost its online sales. As the company’s brick-and-mortar stores are being used more for showrooming than actual purchasing, sales dropped 4.3 percent over the quarter. In the year-ago quarter sales slipped only 0.7 percent. In particular, decreasing sales of televisions, notebook computers, gaming and digital-imaging devices over the quarter far outweighed increasing sales of mobile phones, appliances and tablets.

In an interview with Bloomberg News last week, Joly told the publication that Best Buy does not have the same consumer recognition as Amazon and Apple (NASDAQ:AAPL). “Best Buy has lost a little bit of this,” he said. “We need to reinvent our brand identity.” One method he outlined at the company’s investor conference last week to accomplish that target was strengthening Best Buy’s customer service. “We have a highly skilled and engaged workforce that is passionate about customer service,” Joly said. “This is a very strong platform on which to build.” However, high spending on training and compensation for sales employees caused U.S. selling, general and administrative expenses to rise over the quarter. As a results, gross profit dropped from 25.6 percent to 24 percent.

Third-quarter revenue was in line with expectations, falling 4.7 percent to $7.7 billion.

Shares in Best Buy have fallen by 41 percent this year through Monday. After the company’s earnings report was released, shares initially dropped 6 percent to $12.93 in pre-market trading. After the market opened, the company’s stock price fell an additional 3 percent to $12.47 per share.

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