Best Buy Co., the nation's largest consumer electronics chain, sent a shiver through the retail and financial markets Wednesday as it sharply reduced its profit forecast due to plummeting sales -- a sign that even stronger retailers are on their knees in this economy.Saying it could no longer accurately predict its future, the Richfield, Minn.-based retailer warned sales for the final four months of its fiscal year ending Feb. 28 could decline 5% to 15%. Those end-of-year sales typically make up more than half of Best Buy's annual profit.
"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen," Best Buy Chief Executive Brad Anderson said. "Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year."
Best Buy now expects sales for the full fiscal year to drop as much as 8%, a far cry from the 3% gain it had estimated in September. The retailer chopped its annual earnings projection to anywhere from $2.30 to $2.90 a share, down from a prior prediction of $3.25 to $3.40 a share.
Analysts are predicting sharper price cuts on flat-panel televisions and Blu-ray players in the coming weeks as a result of Best Buy's announcement, saying that there is no longer any doubt that retailers are stuck with more electronics than they can sell.
That could mean better deals for consumers but lower profit for big manufacturers, such as Sony Corp., Samsung Electronics Co., and retailers. Retailers will be forced to seek new buying terms with manufacturers so that they can lower prices, or return merchandise.
Barron's Online Bob O'Brien says that we are facing the worst holiday sales season in 25 years, and Wal-Mart may be one of the better performing companies. (Nov. 12)
Retail analysts had expected Best Buy, an industry bellwether which commands 21% of the U.S. consumer electronics market, to reduce its profit forecast. But the severity of the cuts caught them by surprise and led some to conclude that spending declines could spell doom for weaker retailers -- notably Circuit City Stores Inc., which sought bankruptcy-court protection on Monday.
"The dire scenario" Best Buy described "makes it hard to believe the secondary players survive," said Credit Suisse retail analyst Gary Balter.
One factor contributing to slower sales, especially sales of big-ticket electronics, is tightening credit card limits. A Federal Reserve survey of 55 domestic banks and 21 branches of foreign banks earlier this month found that nearly 60% reported stricter lending standards on credit-card loans.
At a briefing last month with a small group of reporters at the company's Minnesota headquarters, Best Buy President Brian Dunn had expressed confidence that the company would be able to prosper despite the downturn. But on Wednesday, he said, "In 42 years of retailing, we have never seen such difficult times for the consumer."
Best Buy's grim outlook stung shares of rival retailers as well as consumer electronics manufacturers. RadioShack Corp., videogame retailer GameStop Corp., and regional appliance seller Conn's Inc. all fell along with Best Buy's stock, which dropped 8%, or $1.91, to $21.97 in 4 p.m. New York Stock Exchange trading.
Among Best Buy's revelations Wednesday was that it believed it had gained market share during September and October, even as it sales dropped markedly -- suggesting that other retailers fared even worse. While Best Buy pointed to macroeconomic trends, critics noted that the company had embarked on an ambitious growth strategy that included expansion into Europe and China, and new mall-based Best Buy Mobile stores in the U.S., even as the economy was softening. Best Buy overreached, they said, and may now be forced to retrench. The company said it is reviewing its options.
"We are making adjustments to planned levels of discretionary spending and inventory for the remainder of the year," said Jim Muehlbauer, Best Buy's chief financial officer.
That's bad news for a variety of suppliers, which are seeing their own sales contract. Of course, not every electronics manufacturer is feeling the pinch. Bob Perry, a senior vice president at Panasonic Corp., said TV sales are still expected to show an increase this year. No retailers have begun to return TVs, he said.
"In terms of their TV business, we are not suffering the great depression," Mr. Perry said. Best Buy, which last quarter said inventory levels had increased by 9%, said stocks continue to be high, but are below a year ago. Spokeswoman Susan Busch said the retailer won't detail the steps it is taking to reduce inventory until it reports third-quarter earnings on Dec. 16.
Best Buy also said it secured a new $150 million line of credit after its access to capital was hurt by the bankruptcy of Lehman Brothers Holdings Inc.
