Best Buy Co. BBY -7.47% is beginning to acknowledge that its big-box business model, which dominated electronics retailing for much of the past two decades, is no longer working.
The U.S.-based electronics chain said it would close 50 big-box stores this year, test new store formats in San Antonio and Minneapolis, and lay off 400 corporate and support workers as part of a plan to trim $800 million in costs and restructure its ailing business.
“I am not satisfied with the pace or degree of change we have made up to this point,” Chief Executive Brian Dunn said in a conference call with analysts, adding, “We are evolving our retail-store strategy. We are increasing our points of presence while decreasing our overall square footage.”
Best Buy shares were off 7.7% at $24.56 on Thursday afternoon on the New York Stock Exchange.
Also Thursday, Best Buy reported a $1.7 billion loss for its fourth quarter ended March 3.
The Richfield, Minn., company is struggling to adapt to a changed landscape in retailing that has left many big specialty stores looking like dinosaurs.
Consumers armed with mobile phones are increasingly using stores as showrooms to check out merchandise they later purchase for less online, a trend greatly benefiting Internet retailers such as Amazon.com Inc. AMZN +1.69% that aren’t encumbered by the costs of running physical locations and in many cases don’t have to collect sales tax. Meanwhile Apple Inc.’s AAPL -1.27% phones and tablets, showcased in its own namesake stores, have eroded the status of specialty chains as the one-stop shop for the latest in gadgetry.
In response, Best Buy said it will launch large-scale tests of what it calls new “connected store” formats in the Twin Cities of Minneapolis and St. Paul, Minn., as well as San Antonio. The stores, which will emphasize services such as technology support and wireless connections, will feature large new hubs at their center to assist shoppers, as well as reconfigured checkout lanes and new areas to accelerate the pickup of items purchased earlier online.
Best Buy said it will increase worker training by 40% and offer sales staff financial incentives, a move that boosted mobile-phone sales when it incorporated it into that part of its business.
The company said it expected to reduce square footage in San Antonio and the Twin Cities by 20% as part of the changes, by shutting down some big-box stores and replacing them with smaller locations, as part of what it called a “customer transfer” strategy that could spread to other markets if it is successful. Overall, the closure of 50 big-box stores would reduce its 1,100 U.S. locations by about 4.5%.
Analysts, who have criticized an earlier Best Buy pledge to shrink its square footage by 10% as insufficient, said the move to rethink the purpose of Best Buy stores was long overdue. “This is what needs to be happening,” said David Strasser of Janney Montgomery Scott, who said he believes Best Buy remains positioned to prosper in the long term with a smaller-store presence. “We’ll see what happens with these tests in Minneapolis and San Antonio, because that could transform the model further.”
Meanwhile, Best Buy plans to shift its growth focus by opening 100 Best Buy Mobile locations, smaller stand-alone stores that largely sell smart phones and tablet computers.
Best Buy’s loss of $1.7 billion, or $4.89 a share, compared with a year-earlier profit of $651 million, or $1.62 a share. It included $2.6 billion in restructuring costs and other charges the company previously announced as it exited its big-box store business in the U.K. Stripping out those one-time costs, Best Buy’s per-share profit of $2.47 exceeded the $2.16 expected by analysts.
Yet while revenue rose 3.4% to $16.63 billion, sales at stores, websites and call centers at stores open at least 14 months fell 2.4% compared with a year earlier. The declines, largely due to drops in sales of television sets and laptop computers, came despite a 21% increase in online sales.
Best Buy estimated it actually gained market share despite the middling numbers in what was a declining electronics market overall.
For the full year, Best Buy said revenue rose 2% to $50.7 billion. That included a comparable-store decline of 1.7% over the year before, despite 18% domestic online growth and a 13% increase in mobile-device sales in the U.S.
Looking ahead, it projected earnings of between $3.50 to $3.80 a share for its new fiscal year, and generally flat revenue of $50 billion to $51 billion.
The company is also changing its fiscal year to end the Saturday nearest the end of January, effective in the current quarter.