Best Buy’s Warning Dims Retailers’ Hopes
Consumer electronics retail giant Best Buy Co. warned Thursday that profit in the current quarter would be more than a third less than originally projected, triggering a 36% drop in its shares and a slide in the stock of other electronics and video game retailers.
The warning from the nation’s largest consumer electronics retailer, which came amid tepid retail sales reports for July, fueled fears that consumers, who helped lift the economy during the holiday season with an electronics shopping spree, finally are curtailing their spending to match the stock market slump.
“Investors are increasingly concerned about the direction of the consumer,” said David Schick, an analyst at SunTrust Robinson Humphreys. “The consumer has been a huge pillar of this economy through thick and thin. Now it seems they’re sick of it.”
Best Buy, which has 1,800 stores, attributed weak sales to a drop in consumer confidence.
“We’ve all been asking when Wall Street was going to hit Main Street,” said Shannon Burns, Best Buy’s senior manager for investor relations. “That happened in July, and consumers are now realizing that the declines in their investment portfolios are affecting their wealth.”
Best Buy, the worst performer on the New York Stock Exchange on Thursday, touched a 52-week low before settling at $19.55, down $11.25. Shares of other electronics retailers also fell, including Circuit City Stores, which slid $1.24, or 8.3%, to $13.76, and Ultimate Electronics Inc., which fell .$4.16, or 32%, to $9.
Retail sales fell 2.6% in July compared with a year earlier, according to Bank of Tokyo-Mitsubishi’s retail sales index. Sales were down from a 5.1% gain in June and a 4.2% average monthly year-over-year increases from February to July.
But Best Buy’s announcement startled investors. The company, which does not usually give monthly guidance, said earnings in the three months ending Aug. 31 probably would be 17 to 21 cents a share because of flat sales in July. Analysts had estimated that it would earn 32 cents. A year earlier, the Eden Prairie, Minn., retailer posted per-share earnings of 26 cents.
“We saw weakness across the board, across all store brands, all products lines and all geographies,” Burns said.
The news comes on the heels of robust spending last year on home entertainment and consumer electronics such as DVD players, digital music players, digital cameras, wide-screen televisions and video game consoles. Much of the spending occurred after the Sept. 11 terrorist attacks, which dampened travel and caused U.S. consumers to focus more on their homes. In addition, federal tax rebates last summer helped spur spending. Those factors, however, have run their course, analysts said.
“People are now looking for value,” said Susan Kevorkian, consumer devices analyst for research firm IDC. “This year, if it costs more than $200, it’s going to be a lot harder to sell.”
Not all categories will do poorly.
“Small-ticket items should benefit this season, but large-ticket items, particularly [personal computers] will suffer,” said Rob Enderle, technology analyst with Giga Information Group Inc. “The strongest segment remains games.”
Despite forecasts of double-digit growth for the game market this year, shares in major game publishers and retailers slipped Thursday. Electronic Arts Inc. fell 31 cents to $59.60, THQ Inc. lost 70 cents to $22.95, and Activision Inc. shed 55 cents to $27.43. Electronics Boutique Holdings Corp., a retailer that specializes in games, fell $2.01 to $22.21 even amid expectations that same-store sales will increase 10% to 15% this year.
Meanwhile, overall retail sales were sluggish in July, a traditionally slow month lodged between beginning-of-summer purchases and back-to-school shopping. But in comparison with last year, when tax rebate checks buoyed the sector, sales looked particularly slack.
Goldman Sachs’ retail index put July sales in stores open at least a year as 1.4% ahead of last year, mostly on the strength of discount stores, which saw sales rise 4.3% ahead of last year.
Department stores and specialty apparel sellers suffered, with sales at stores open at least a year--a key measure of growth--down 3.4% and 3%, respectively.
Wal-Mart Stores Inc. saw a 4.5% bump in same-store sales in July. The rise, however, was below its projections for the month, and analysts expressed concern that sluggish retail sales would drag into the crucial holiday season. Wal-Mart’s shares rose 81 cents to $49.19 on the NYSE.
Federated Department Stores Inc. saw same-store sales drop 5.2%, and clothing retailer Gap Inc. saw an 8% drop. Federated shares gained 48 cents to $34.50, and Gap rose a penny to $11.16.
