Best Buy's Q2 highlights challenges facing new CEO

Summary:Best Buy is facing weak demand in China, U.S. and Europe and the big wait ahead of Windows 8. And then Best Buy needs to correct its long-term issues.

Best Buy's fiscal second quarter results illustrated the laundry list of issues new CEO and turnaround specialist Hubert Joly will face.

Here's the short version:

  • Best Buy saw both earnings and revenue fall short of Wall Street expectations.
  • The company declined to give an outlook for the rest of its fiscal year citing Joly's arrival and market uncertainties.
  • Best Buy's cost structure is too high.
  • Demand in China and Europe has been weak and the U.S. is soft.
  • Technology buyers are holding off on purchases ahead of a bevy of product launches ranging from the latest iPhones and iPad from Apple and Windows 8 from Microsoft.

And that list was just this quarter. The long-term issue for Best Buy is whether it can meld multichannel retailing across online, physical, mobile and social.

Also see:  What can Best Buy learn from T.G.I. Friday's?

Simply put, Joly has his work cut out.

As for Best Buy's results, the company reported fiscal second quarter earnings of $12 million, or 4 cents a share, on revenue of $10.57 billion, down 3 percent from a year ago. Same store sales were down 3.2 percent.

Non-GAAP earnings for the second quarter were 20 cents a share. Wall Street was expecting earnings of 31 cents a share.

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On a conference call with analysts, interim CEO Mike Mikan, who is yielding to Joly, made the following points:

Markets in China and Europe are facing enormous difficulties and that has had a negative impact on you us. In the U.S., economic conditions are soft and will probably remain so for the indefinite future. Consumers remain very cautious and sales in the industry may be dampened at the moment by those who are holding back on spending as they await some highly anticipated new technology releases. Like virtually every other competitor in the consumer electronics sector, Best Buy's second quarter reflects these realities.

And.

Best Buy clearly remains in turnaround which will take time to come out of. Given reality, and the fact that we've just welcomed a new CEO to the Company, we are suspending Best Buy's share repurchases and earnings guidance for fiscal year 2013.

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CFO Jim Muehlbauer said that Best Buy was rejiggering its cost structure and that its issues weren't completely company specific. He said:

From a revenue perspective, consumer demand in several large categories continues to be challenged. ... I do want to highlight specifically in what we've talked about in the sales trends and margin trends in our business are not things that we see unique to Best Buy. We certainly see them being driven by the same industry mix factors that are happening in the business and basically being driven by what consumers are currently interested in buying in key categories, whether it's smartphones, tablets and current notebook space. It's difficult to predict where consumers are actually going to go during that period, especially with all through releases that are coming out.

The bottom line for Best Buy right now is that it's holding out for multiple items to fall into place. To wit:

  • Best Buy has done prework for Joly's arrival, but the turnaround specialist needs to move fast.
  • Notebook sales were weak ahead of the "important launch of Windows 8. Muehlbauer said that Best Buy is positioning itself for Windows 8.
  • China and Europe economies are dicey.
  • Mobile outperforms.
  • And there's no evidence that the typical tech buying cycle is changing so far.

 

Topics: Tech Industry, Mobility

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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