October 24, 2012 / 8:49 PM / 8 years ago

Best Buy warns on profit; U.S. unit head to leave

(Reuters) - Retailer Best Buy Co Inc (BBY.N) on Wednesday warned earnings and same-store sales would fall for its fiscal third quarter, and said the head of its U.S. business will leave as it starts to restructure under a new chief executive.

Mike Vitelli, U.S. business president for Best Buy Co., speaks at the Reuters Retail and Consumer Summit in New York June 17, 2008. REUTERS/Brendan McDermid

Best Buy shares fell 6.8 percent in after-hours trading. The news came less than a month before the unofficial start of the biggest selling season of the year for the No. 1 U.S. electronics chain.

U.S. business president Mike Vitelli will exit at the end of the current fiscal year in early February with a lump-sum payment of $1.45 million. The executive vice president of U.S. operations will also depart.

The move is the first big structural change under new CEO Hubert Joly, who was brought in as the company grapples with the rising trend of shoppers who treat its stores like showrooms for cheaper online retailers.

In August, the world’s largest consumer electronics chain suspended profit forecasts and share buybacks for the rest of the year to give its newly named chief executive time to construct his own turnaround plan.

The company is also waiting for its former CEO and largest shareholder, Richard Schulze, to decide whether he can put together a buyout bid.

Yet one analyst said the most troubling news of all was a decline in the company’s gross margins, which suggests how aggressive it has become with promotions to lure customers.

“If they try to compete on price they are doomed. Their cost structure doesn’t allow that,” said Wedbush Securities analyst Michael Pachter. “They have to figure out how to charge a higher price and make shopping in their stores a rewarding experience.”


Best Buy said it now expects earnings for the fiscal third quarter ending November 3 to fall “significantly below” those of a year earlier, excluding one-time items, due to falling margins and declines at sales at established stores.

Analysts polled by Thomson Reuters I/B/E/S on average had expected earnings per share of 36 cents in the quarter. In the fiscal third quarter a year earlier it earned 47 cents per share on an adjusted basis.

“I think people were looking for more out of the third-quarter results given that we had some big product launches,” said Morningstar analyst R.J. Hottovy. “Even though it was toward the end of the quarter, you had the iPhone 5 out there.”

The retailer also warned same-store sales would decline in the low-to-mid single digits for the period. Best Buy has posted same-store sales declines in eight of the last nine quarters.

Best Buy shares fell to $15.77 in after-hours trading from a $16.92 close on the New York Stock Exchange. The company also said Wednesday that it would hold an investor day on November 1 to discuss Joly’s plans for the future.

Reporting by Brad Dorfman in Chicago and Dhanya Skariachan and Phil Wahba in New York; Writing by Ben Berkowitz; Editing by Gary Hill, Leslie Adler, Tim Dobbyn and Andrew Hay

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