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Best Buy optimistic
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November 23, 2001: 4:20 p.m. ET
Electronics retailer expects strong holiday sales despite dip in economy.
By Staff Writer John Chartier
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NEW YORK (CNN/Money) - Reginald Anthony stood passively in the seemingly unmoving line beside the cart containing the computer he planned to buy his son for Christmas.
"I waited just for this day. I promised my son I would buy him a computer," the 41-year-old general contractor from Jersey City, N.J., said as he patiently waited to pay for the PC at the Best Buy electronics store in Secaucus Friday, the day after Thanksgiving and one of the busiest shopping days of the year.
Economists and retail industry analysts had Anthony in mind when they made their predictions for disappointing holiday sales amid a slowing economy made worse by the Sept. 11 terrorist attacks. Anthony said he has not focused on discretionary buying since hijackers rammed passenger jets into the World Trade Center and the Pentagon, killing thousands. Additionally, he said work has slowed since the attacks, leaving him with less money to spend.
Nevertheless, the deal on a Hewlett-Packard (HWP: Research, Estimates) computer complete with monitor, printer and a year of free Internet service for $400 after rebates proved too good to pass up. Though steep discounts drove the sale, as analysts predicted would happen this year, Best Buy is capturing market share this holiday season by pleasing customers like Anthony with clean, crisp stores, fully stocked shelves, good customer service and competitive prices.
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Shoppers took advantage of big sales at Best Buy in Secaucus, New Jersey. | |
And with plenty of room for expansion, Wall Street believes Best Buy is positioned for strong earnings growth at least over the next five years as it continues to squeeze more mature rivals such as Circuit City Stores and RadioShack (RSH: Research, Estimates).
"The company is well-positioned to continue to dominate consumer electronics retailing for the foreseeable future, and we view the current valuation as an opportunity to buy a blue chip retailer at a bargain price, Sanford C. Bernstein retail analyst Colin McGranahan said in a research note earlier this month.
The Minneapolis-based company, which is due to report November sales on Dec. 6 and third-quarter earnings on Dec. 18, has not changed its outlook for the holiday season or the quarter.
Best Buy's stock plunged 70 percent from a high of $69.90 in July to $40 in the weeks following the Sept. 11 terrorist attacks, but then it quickly bounced back to $67.22 by Wednesday.
Best Buy (BBY: Research, Estimates) has been able to maintain profits, reporting a higher second-quarter profit that edged Wall Street estimates on Sept. 18, a week after the terrorist attacks.
Despite a sharp falloff in personal computer sales combined with a sluggish economy, Best Buy has managed to grab market share from rivals Circuit City (CC: Research, Estimates) and RadioShack, and has even held its own against Wal-Mart (WMT: Research, Estimates) in electronics and media.
Best Buy copped a chunk of that market share earlier this year when it expanded into the Northeast, particularly in the New York metropolitan region.
The company has not backed off its aggressive expansion plans announced last year of opening 60 new stores a year for the next five years. It currently operates 477 Best Buy stores, along with 627 SamGoody stores, 222 On Cue stores, 396 SunCoast Video shops and 76 Media Play stores.
Earlier this month, Best Buy completed the acquisition of Canada's FutureShop.
But analysts don't appear worried that the company is over-extending itself in risky economic times.
"What we did was look at the extent of market saturation in each of the sectors, but our conclusion is that the consumer electronics sector is very fragmented, and there's room for at least four more years of growth for Best Buy," said Sanford C. Bernstein's McGranahan, who initiated coverage of the company earlier this month with a "buy" rating.
A visit to the store, which sits just across the Hudson River from Manhattan, on Black Friday, the official start of the holiday shopping season, revealed a bustling store full of consumers snapping up bargains on PCs, home theater systems, video games, DVD players and televisions.
General Manager Carmen Fulchini said sales are already outpacing those of a year ago, when the store first opened as part of Best Buy's aggressive expansion into the Northeast.
"It's definitely about what we expected," Fulchini said of sales. "We're pretty optimistic about the holidays at the moment."
Other than new video-game console and game offerings such as Xbox from Microsoft (MSFT: Research, Estimates) and Nintendo's GameCube, and music and movie sales, analysts are not anticipating consumer electronics will log a particularly strong holiday season. That's due in part to the generally higher prices home theaters and big-screen televisions command compared with other items given the sluggish U.S. economy, which some analysts believe is already in recession.
Yet customers turned out in force Friday at Best Buy. Granted much of it was bargain-driven as several customers acknowledged, but the store's operation is also playing a big part.
Best Buy runs a lean operation, maintaining a debt-to-capitalization ratio of 14 percent and the potential to generate more than $1 billion in cash flow in spite of an aggressive acquisition binge over the past year and a growth plan that calls for opening 60 new stores a year for the next five years.
"Best Buy is one of the strongest retailers in the U.S. today," McGranahan said. "It is dominating in its core big-box consumer electronics format and has three-to-four more years of continued store expansion, which will add over $2 billion to revenues annually."
However, nothing is certain given the slowdown in consumer spending that has plagued retailers all year. The real proof in holiday spending is yet to come. Holiday sales slowed last year after robust Black Friday sales, and as a result, retailers were stuck with mounds of unsold inventory.
Though retailers were more careful in their planning this year, no one could foresee the Sept. 11 attacks, and many are holding their breath, including Best Buy, and offering big discounts to move merchandise out of the stores.
Best Buy is banking on Americans' tendency since the attacks to spend more time at home, or to at least focus more on their homes, family and friends, to help it log a stronger holiday season than anticipated.
"We remain cautiously optimistic," spokeswoman Donna Beadle said. "People are spending more time at home, and they need some way to entertain themselves at home.... Consumer electronics has been one of the top five hot gifts for the past five years, so you have that mixed with people cocooning. But we still have caution. This is the first time any of us has been in a situation like this." 
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