COMMENTARY--Best Buy provided further evidence that PCs are just passé.
The electronics retailer just reported a terrific fourth quarter, easily topping analyst estimates and telling Wall Street to raise its expectations for fiscal 2001. Investors cheered the report, boosting Best Buy (NYSE: BBY) shares more than 9 percent today.
It's easy to see why. A 27 percent increase in overall revenue is impressive enough, but even more noteworthy is Best Buy's ability to increase its comparable store sales, or revenue from stores open at least a year. Best Buy's comps didn't rise by much, only 1.8 percent year-over-year, but considering the U.S. economy these days, any improvement deserves commendation, especially when it's related to the technology business.
But the company's future vision won't make PC lovers smile.
Home office products--mainly computers and related peripherals--are Best Buy's single largest segment for now. The company expects that to change.
"Suffice it to say that while we expect and had planned all along for the home office category to diminish in its total size against our complete mix, the consumer electronics will continue to grow in the other direction," Best Buy CEO Richard Schulze said during the company's conference call with analysts this morning.
"Wouldn't be a bit surprised to see these two categories shift in their total financial contributions to the company over the next four to five years, with consumer electronics becoming far and away the larger category, with much stronger gross margins," he said.
As for PCs, the company does see some strength in notebooks, personal digital assistants and related accessories, but desktop computer sales remain soft. Schulze cited a saturated market and a weak product cycle in the first half of this year (read: no new chips) as reasons. In any case, computers are the most competitive and lowest gross margin category for Best Buy.
The retailer's willingness to quickly embrace consumer trends explains much of the company's recent success. Schulze noted that demand is high for digital cameras and camcorders, DVD players, wireless communications, and digital television. By year's end, digital consumer electronics should generate 18 to 19 percent of Best Buy's total revenue, executives said.
The retailer is pushing these items, especially digital TV, while they can still command high prices. The average price of a digital TV is $2,300, or more than your average PC, and with a fatter profit margin to boot. Schulze expects TV prices to drop below $2,000 by the end of the year.
Still too expensive for my tastes and probably yours too, but there are enough idio...uh, cutting-edge aficionados willing to shell out five figures to watch sharper versions of "Honeymooners" re-runs, and Best Buy is smart to cater to them.
Research firms joined the investor applause. Immediately following Best Buy's conference call, Deutsche Banc Alex Brown analyst Dan Wewer upgraded BBY to "buy" from a "market perform" rating. Merrill Lynch analyst Peter Caruso boosted his BBY earnings estimates.
"We believe that Best Buy gaining market share rapidly provides a buffer against the consumer spending slowdown," Caruso wrote.
Best Buy's solid performance offers a marked contrast to its main publicly traded competitor, Circuit City (NYSE: CC), which reported quarterly results yesterday. Circuit City topped estimates, but its comparable store sales dropped 11 percent year-over-year, and the company offered a comparatively weak forecast for the year.
"BBY is probably the most important beneficiary of Circuit City's weakness, given that roughly 50 percent of BBY's store base overlaps with that of CC's," Wewer said in his research note. "We have seen and continue to expect to see BBY gaining share at the expense of CC."
Circuit City still relies too much on PCs and older types of home electronics. Robinson-Humphrey analyst David Schick summed up Circuit City's biggest hurdle. "First they need to have the products that people want and have to let the people know they have them," he told Reuters.
It sounds like a simple formula, yet companies have a hard time figuring it out. Too many people are afraid of de-emphasizing the product lines that worked in the past. Maybe Best Buy's results will convince folks to look to the future. 22GO>