After years of slipping sales and struggling performance among retail stocks, Best Buy Co Inc. (NYSE: BBY) has decided to revamp — a long overdue move to hold on to customers and investors.
Best Buy announced today (Thursday) that it would close 50 stores and redesign its big box business model to compete with online retailers.
Best Buy, the world's largest consumer electronics retailer, has suffered six straight quarterly sales declines at stores open at least 14 months. It also reported Thursday a fourth-quarter loss of $1.7 billion.
The news triggered Best Buy shares to slide almost 10% in early morning trading.
Best Buy's initiative to finally update its business model and adapt to a changed retailing landscape could be too late to salvage sinking investor confidence, signaled by today's selloff.
"We are concerned that a turnaround of this magnitude will further weaken Best Buy and increasingly distance it from its vendor partners and core customers in an already very precarious environment," Oppenheimer analyst Brian Nagel told MarketWatch.
Best Buy (NYSE: BBY) Ditches Big Box
The problem Best Buy faces is not getting people in the door, but getting them to buy.
Low prices from online retailers like Amazon.com Inc. and discounters like Wal-Mart Stores have cut into Best Buy's market. Now shoppers tend to go to Best Buy locations to scout out products, but then hunt down lower prices online.
Best Buy stores have essentially become showrooms for products ultimately bought at lower-priced retailers like Amazon, Wal-Mart, Target, or eBay.
The big box store model has ruled electronics retailers for years, but Best Buy's new commitment to change acknowledges that era is over.
"I am not satisfied with the pace or degree of change we have made up to this point," Chief Executive Officer Brian Dunn told analysts on a conference call. "We are evolving our retail store strategy. We are increasing our points of presence while decreasing our overall square footage."
The new Best Buy stores, called "Connected Stores," will be smaller and streamlined. They'll emphasize tech support and offer wireless connections.
Best Buy plans to reduce square footage by 20%. The stores will focus on selling cell phones, tablet computers, and e-readers.
For enhanced customer service, Best Buy employees will instruct customers on how to connect electronics at home. Sales staff will get financial incentives – a tactic that boosted sales when used before. Worker training also will increase by 40%.
Best Buy Price History
To increase customer loyalty, Best Buy will offer new service plans not available on products purchased through Amazon and Wal-Mart.
It'll test the new smaller stores in San Antonio, TX, and St. Paul, MN.
Best Buy also plans to open 100 smaller mobile-only stores in fiscal 2013, and operate 600 to 800 mobile-only stores by 2016, up from 305 today.
Best Buy Bottom Line
Best Buy expects the changes to bring cost reductions totaling $800 million by fiscal 2015, starting with $250 million in the next fiscal year. The company will also cut about 400 positions from its corporate structure, saving an additional $300 million.
Analysts said the changes were long overdue.
"This is what needs to be happening," David Strasser of Janney Montgomery Scott told The Wall Street Journal. "We'll see what happens with these tests in Minneapolis and San Antonio, because that could transform the model further."
But is it too late for Best Buy to turn around? Investors weren't convinced they should stay to find out.
Dismal earnings Thursday led investors to ditch the stock. Best Buy's fourth-quarter loss of $4.89 a share compared to a year-earlier profit of $651 million, or $1.62 a share.
While sales of tech gadgets like tablets and e-readers will increase this year, Best Buy has a long way to go to compete with online retailing and popular discounting. Shoppers have become accustomed to not buying from Best Buy – and may not be easy to persuade otherwise.
Besides, often extreme cost-cutting measures are too futile for a company with Best Buy's business model.
"They are trying to save their way to prosperity and that is hard for a big-box retailer," Michael Pachter, an analyst with Wedbush Securities, told Barron's.
Pachter said Best Buy is missing "a sustainable competitive advantage" and that there are "cheaper and far more convenient alternatives online to everything Best Buy offers except their services."
Best Buy (BBY) closed down 6.95% Thursday at $24.67.
News and Related Story Links:
- Money Morning:
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- Money Morning:
Growth of Online Retailers Makes Internet the New Shopping Battleground
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- The Wall Street Journal:
Best Buy Rethinks Its Business Model