Best Buy expects short-term product shortages, delays from coronavirus

Best Buy is already seeing lighter inventory in some areas and expects to see more product shortages in the coming months because of the coronavirus outbreak in China, where most of its vendors are still not back up to full speed.

CEO Corie Barry said Thursday it's still a fluid situation and hard to quantify the full size of the effect of the deadly illness on the business. Still, executives of the Richfield-based retailer factored it into their guidance for the year with an expectation for depressed sales in the first half of the year that they don't expect to fully make up later in the year.

As a result, Best Buy issued a muted, but still positive, forecast for the coming year calling for flat to 2% growth in comparable sales.

"We are seeing some areas where we're starting to see less stock available," Barry told reporters after Best Buy reported stronger-than-expected sales and profits during the holidays. She did not specify which products are already being affected.

"Very few" of Best Buy's vendors that have production in China are back up and running at full capacity, as many workers stay at home to avoid contracting the potentially deadly virus, Barry said.

"Some vendors are telling us they're struggling to staff," she said. "Or they are purposefully staffing light so they can rotate employees in. In some cases, we're hearing from vendors that while they don't have finished goods in Asia, they're waiting for component parts and pieces."

At the same time, as the largest consumer-electronics retailer in the U.S., a country that is the largest consumer of such products worldwide, Best Buy has more leverage with its vendors as they look to divert safety stocks or surplus inventory in other parts of the world to the U.S., she said.

Seth Sigman, an analyst with Credit Suisse, said the novel coronavirus does add uncertainty to the picture for Best Buy after being a "key winner" over the holidays.

"We do view this as largely a blip" in the first half of the year, though, with other growth drivers for Best Buy in the latter part of the year, he wrote in a research note to clients.

Executives also said that they expect the disruption to the supply chain to be a short-term issue that won't hurt their long-term strategy and initiatives.

Best Buy's shares, which had tumbled 9% earlier this week as concerns over the coronavirus rattled global markets, fell another 5% Thursday on a day when the three largest U.S. indexes fell significantly.

Analysts were expecting Best Buy to be conservative with its guidance given the coronavirus outbreak, which has shut down or delayed production in many parts of China, the largest source of consumer electronics products.

At the same time, the 2020 outlook for sales of consumer electronics in the U.S. is otherwise quite healthy with the NPD Group forecasting 5% growth in the category this year before coronavirus became a major issue.

Matt Bilunas, Best Buy's chief financial officer, told analysts on a conference call that executives still see a very positive consumer-spending environment, similar to last year, amid low unemployment and wage growth. The company also expects to see strong growth from its Total Tech Support services offering as well as sales in categories such as appliances and headphones. Adoption of new technologies such as 5G and 8K TVs could provide more opportunities.

But he also noted that Best Buy expects gaming to be down the first three quarters of the year as new gaming consoles are not expected to launch until before the holidays.

While some high-performing retailers such as Walmart and Target stumbled during the most recent holidays with lower-than-expected sales, Best Buy reported strong sales during its fourth quarter. Demand for headphones, computers, appliances and mobile phones helped drive 3.4% growth in comparable sales in the U.S.

"We found Best Buy's performance all the more noteworthy given the compressed holiday selling season, which tripped up several large U.S. retailers," Anthony Chukumba, an analyst with Loop Capital, wrote in a note to clients, alluding to the six fewer days between Thanksgiving and Christmas last year. He called the retailer's holiday results "impressive."

"We were also encouraged by management's [fiscal year] guidance given Asian supply chain disruption fears," he wrote.

In the fourth quarter, Best Buy's profit rose 1.4% to $745 million. When adjusted for various items, it earned $2.90 a share, which was better than the $2.75 analysts had been expecting.

Its total revenue increased 2.7% to $15.2 billion.

During the holidays, Best Buy rolled out free next-day delivery on thousands of items as well as dozens of new pickup locations for online orders inside CVS and UPS stores across New York City. It had also begun adding curbside pickup options to some stores.

Barry told analysts Thursday that it has recently expanded those alternative pickup points to 2,000 locations in nine markets, with plans to roll out more this year, and expects to expand curbside pickup to most stores this year.

Other plans for the year include rolling out digital shelf tags to all its stores and expanding into new categories, mostly online, such as hearing aids, sustainable living products and luggage.

It is also piloting a small number of store remodels.

Earlier this month, Best Buy's board reaffirmed its support of Barry following an investigation into her personal conduct.

Kavita Kumar • 612-673-4113