Disappointing Holiday Sales, But Is Best Buy On A Turnaround Track?

Best Buy (NYSE:BBY)  released it December sales report, confirming that Holiday sales were weaker than hoped.  Revenues declined a 0.8% year on year and same store sales were down 1.2%..  Based on this report,  the company updated its fourth quarter outlook to a decrease of 1.5% in revenues versus its previous expectation of near flat revenues. ^[1]. While these disappointing results impacted the company’s stock price significantly, Best Buy’s topline performance has been better than the industry. According to NPD group’s weekly tracking service, revenues in the consumer electronics (CE) industry declined 4.8% year on year during the holiday period (9 weeks ended January 2, 2016) and sales of the products included in this category account for nearly 65% of Best Buy’s domestic revenues. ^[1]. While the consumer electronics industry as defined by NPD does not include mobile phones, where Best Buy registered a 7.2% decline in revenues year on year, we believe the company has performed better than the industry in several other segments of its business and is on track for improved profitability in the long term, as it continues implementation of its “Renew Blue” transformation program.

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Slowing Smartphone Sales, Apple’s iPhone Losing Its Popularity

Best Buy reported more than 7% decline in its computing and mobile phones segment over the holiday period. This figure was flat during the same period in the previous year. While other segments such as appliances and consumer electronics saw an increase in revenues, this growth was offset by the decline in smartphone sales, leading to an overall slight decrease in revenues. According to IDC, 2015 will be the first full year of single digit world-wide smartphone growth, with expected growth around 9.8%, although it believes that iPhone sales will continue to increase. ^[2]. While Apple’s iPhone is seeing growth in regions outside the U.S., its core markets have transitioned into replacement markets.  According to a research from Raymond James, a majority of Americans want to buy an Android phone as their next phone rather than an iPhone.  ^[3].

According to Raymond James, Apple will sell around 224 million to 229 million iPhones in FY 2016, which is lower than its 231 million figure for FY 2015. ^[3]. While Best Buy offered several deals on Apple’s products over the holiday season, including the $1 iPhone 6 deal, it appears that Apple is losing its popularity in the U.S. which could be the primary cause of the significant decline in Best Buy’s mobile phone sales, which account for more than 40% of its total sales.

Other Products Preform Better, Higher Profitability Outlook

Despite lower than expected revenues, Best Buy improved its fourth quarter operating income rate outlook and is now expecting a non-GAAP operating income rate decline of 10 to 15 basis points versus the previous expectation of a rate decline of 20-35 basis points. The company believes that its strong expense management and disciplined promotional strategy is leading to this improvement. ^[1]. Its appears that the company has been able to manage its expenses better under the initiatives of its  transformation program “Renew Blue”. While it is struggling with mobile phone sales, in the consumer electronics segment the company has performed better than the industry, which indicates that it gained market share in this space.

The mobile phones segment is the highest contributor of revenues for Best Buy and a significant decline in the sales of this segment will impact growth, we believe.  Still, as it captures market share from smaller players in other segments and improves profitability by focusing on cost reduction, the company should be able to meet its turnaround goals, in the long term.

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1. Best Buy Reports Holiday Revenue Results, Best Buy Investor Relations, January 14, 2016 [↩] [↩] [↩]
2. Worldwide Smartphone Market  Will See The First Single-Digit Growth Year On Record,IDC, December 2015 [↩]
3. America may be the reason  people are saying iPhone sales have gone into decline, Business Insider, December 2015 [↩] [↩]