|
Best Buy bullish on holiday
|
 |
December 6, 2001: 3:25 p.m. ET
Electronics chain's holiday slower than year ago but still above-plan.
By John Chartier
|
NEW YORK (CNN/Money) - Consumers may be scaling back purchases this year amid the slowing economy and the Sept. 11 terrorist attacks, but they're still excited enough to shell out cash for digital televisions and DVD players.
Best Buy Inc., the No. 1 consumer electronics chain, posted a 1.6 percent increase in sales at stores open at least a year, a key gauge known as same-store sales. That's a smaller increase compared with a year ago, but nevertheless it beat the company's own forecasts, according to CEO Richard Schulze.
Though November sales beat company expectations of flat to a 2 percent decline, they did not meet the expectations of the most optimistic investors who took that as a cue to sell the stock, causing the shares to tumble about five percent in late-day trading Thursday.
The company, which drove traffic at the start of the Thanksgiving weekend with targeted discounts, said it is continuing to log decent sales this holiday season despite the slowing economy made worse by the Sept. 11 attacks.
Many on Wall Street had expected consumer electronics to be a lackluster player this year as Americans cut back in the shadow of mounting job cuts and the attacks on the World Trade Center and Pentagon that killed thousands.
But a new cycle of innovation, particularly in DVDs, digital television and other digital components, combined with a renewed focus on the home since the attacks, are helping to drive industry sales, analysts said.
Even rival Circuit City Stores Inc., (CC: up $1.86 to $20.55, Research, Estimates) which has been struggling the past few quarters, posted better-than-expected sales in November.
"We continue to be pretty bullish about the trend this holiday season. I didn't see any shopping mall specialty stores that had the kind of traffic we did," Schulze said Thursday in an interview with CNN/Money.com. "It's certainly a testament to what the brand stands for."
The latest figures out this week from the International Council of Shopping Centers appears to support Schulze's view. Sales at mall-based specialty stores declined 2.6 percent for the first full week of the holiday season, Nov. 26 to Dec. 2.
"Everything has to do with quality," Schulze said, noting that digital products will account for 17 percent of total sales this year compared with 11 percent last year.
"The good news is the mix of merchandise continues to shift to more profitable product, and what we're realizing is richer gross margins."
| |
|
|
| |
|
|
| |
We continue to be pretty bullish about the trend this holiday season
|
|
| |
|
|
| |
|
|
| |
|
|
| |
Richard Schulze
CEO
Best Buy Inc. |
|
Customers in November snapped up entertainment software and video games related to the new offerings such as Microsoft's (MSFT: up $0.55 to $68.65, Research, Estimates) Xbox, Nintendo's GameCube and Sony's PlayStation 2.
Digital televisions, digital cameras, home theater systems and DVD hardware are also selling well so far this season.
Analysts say that's happening industry-wide, but that Best Buy is best positioned to capitalize on the trend.
"I'm positive on the industry, negative on consumer spending. But I'm a big believer in this product upgrade cycle we're in," said Scot Ciccarelli, a consumer electronics analyst at Gerard Klauer Mattison & Co. "Traffic levels remain positive for the rest of this season, and the promotional environment is not as bad as we think."
Ciccarelli maintains an "outperform" rating on Best Buy's (BBY: down $3.83 to $69.48, Research, Estimates) stock, with a $75 price target. Shortly before the close Thursday Best Buy stock was down $3.51, at $69.80 a share, just shy of its 52-week high of $74.23 and 2.3 percent higher than its low of $21.
Schulze, who also founded the company, said he anticipates annual average earnings per share growth of 25 percent.
"We think that's what it takes to remain a top core player," he said.
In addition to innovation driving sales, running a tight ship helps Best Buy stay ahead of rivals such as Circuit City (CC: up $1.86 to $20.55, Research, Estimates) and RadioShack (RSH: up $1.71 to $28.80, Research, Estimates).
The company maintains a debt-to-capitalization ratio of 14 percent, which is pretty lean compared with Lowe's Corp.'s (LOW: down $0.51 to $46.29, Research, Estimates) debt-to-capitalization at about 38 percent. Home Depot (HD: down $0.75 to $49.15, Research, Estimates) , considered by many to have the best debt-to-cap figure, comes in at 7 percent, said Colin McGranahan, an analyst at Sanford Bernstein.
Best Buy also has the potential to generate more than $1 billion in free cash flow from after-tax operating profit. And that's 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, McGranahan said.
Click here for a look at retail stocks
However, rising competition from discount chains such as Wal-Mart (WMT: down $0.95 to $55.62, Research, Estimates) and Target (TGT: down $0.95 to $38.67, Research, Estimates), which are increasingly stepping up their electronics offerings, is keeping Best Buy on its toes.
Through its acquisitions of regional chain SamGoody and Canada's FutureShops, Schulze said he is trying to drive the company toward high-end boutique specialties that offer services not available, and not likely to be available, at broad-based discount chains.
Still, the fierce competition means keeping the shelves stocked and paying careful attention to customer service, which, Shulze said could drive up costs, but would be worth the effort if it snatched customers from rivals.
"If you're going to succeed in growing market share, you need to have the product on the shelf," Schulze said. "Our strategy is to be in stock and provide real value for consumers. The last thing we want to do is pass up an opportunity to take advantage of a trend we see taking place in our stores." 
|
|
|
|
|
 |
|
