original publish date august 26, 2014
It was no secret going into Best Buy’s (BBY) earnings report that it was going to be bad.
Warnings in the rearview mirror from Wal-Mart (WMT) to hhgregg (HGG) to the Best Buy CEO himself (referred to plunging tablet sales mid-quarter) painted a pretty dismal picture for the category. But while most retailers are benefiting from the less-bad-is-the-new-good rally this quarter, Best Buy is under pressure after beating earnings expectations.
Here is the problem.
Best Buy is a cost-cutting story and all good cost-cutting stories eventually don’t cut it. As I have written before, in the end, sales rule and Best Buy is no exception. With domestic comps down 2% this quarter and an outlook for continued negative comps in the low-single digits for the rest of the year, expect industry wide promotions to continue to drag down gross margins.
Here is the long-term story for Best Buy.
- Continued customer migration online, which results in fewer high-gross-margin attachments.
- Continued in-stores investments to keep conversion rates from declining.
- A category that is at the mercy of new product cycles (or lack of new cycles).
- One of the most promotional categories in retail due to commodity products.
- A cost-cutting story that will eventually be overshadowed by lack of turn in sales.
- Pressure from Home Depot (HD), Sears (SHLD) promotions and Lowe’s (LOW) improvements in the appliance category (one of the few that has been showing a positive comps).
Best Buy derives the majority of profits from the all-important holiday quarter. Based on the setup going in to the second half of the year, the promotional environment may just make last year look tame. That means more gross margin pain.