Best Buy sees tough road ahead amid smartphone sales plateau

It's not the best of times for consumer electronics — and Best Buy is feeling the pain.

The Richfield-based electronics retailer said Thursday that the slowdown in smartphones that dinged its sales during the holidays is expected to continue for at least the first half of this year. It forecast no sales growth for the coming year, a speed bump in its multiyear turnaround.

For once, Wall Street didn't punish Best Buy for it. The company's shares rose 2.5 percent following its results and outlook announcement.

"From an execution standpoint, it seems you're doing everything you should, and you can't control these cycles," Daniel Binder, an analyst with Jefferies, said on a conference call with Best Buy executives.

To cope with the upcoming sales lull, Best Buy said it would look to find more savings beyond the $400 million it first announced last year as a three-year goal. The cost-cutting program, which it is calling the second phase of its Renew Blue program, follows $1 billion it slashed in the few years prior as part of CEO Hubert Joly's plan to revive the once-teetering retailer.

"The great news is it comes in lots of forms," Sharon McCollam, Best Buy's chief financial officer, told investors about the cost cuts. "There is no lack of opportunity."

For example, one project the company has worked on that is expected to bear fruit this year is improving the packaging so that TVs, which are bigger and thinner than ever before, don't get damaged in transit, saving the company millions of dollars in losses.

"The flaps on the top of packaging can make the box more or less sturdy," Joly said.

He was not definitive when asked if some savings would come from job reductions, which Joly said he considered a "last resort." If there are parts of the business the company wants to de-emphasize, he said Best Buy would do its best to move people to other areas of growing strategic importance.

In the last couple of weeks, Best Buy laid off a few dozen employees at its Richfield headquarters.

Last year, Best Buy also quietly closed 13 big-box stores in the U.S. as well as 17 smaller mobile phone stores, mostly as those store leases expired. More store closings could follow this year, but executives said they didn't expect it to be a large number.

More than 100 store leases out of its fleet of roughly 1,400 stores come up for renewal this year. While most of those stores are performing well, executives said they will likely close some of the less-profitable stores or ones that overlap with nearby stores. If they renew them, they will look for shorter-term leases as they have been doing recently.

"We will continue to do that to maintain flexibility in the portfolio," McCollam said.

On Thursday, Best Buy highlighted its strong cash flow by announcing a new $1 billion share repurchase program, a 22 percent increase to its quarterly dividend to 28 cents, and a special dividend of 45 cents a share.

In the three months ended Jan. 30, Best Buy's profit dropped 8 percent to $479 million, or $1.40 a share, down from $519 million, or $1.48 a share, a year ago. Adjusted for one-time costs and expenses, Best Buy earned $1.53 a share, well above the $1.39 a share that analysts forecast as the company reined in costs and pared back holiday discounts.

Revenue fell 4 percent to $13.6 billion as the company grappled with lower smartphone sales and fewer stores due to store closures last year in Canada. Comparable sales in the U.S. dropped 1.7 percent.

Executives were careful not to set out any predictions about what Apple might roll out later this year in terms of a new iPhone and whether it would be enough to revive sales in that category. But they noted that appliances, TVs and connected home devices are expected to do well. While virtual reality is making some buzz, Joly acknowledged it would not be big enough to make a dent this year.

"It's not an easy market," Stephen Baker, an analyst with the NPD Group, said of the industry as a whole. "The good parts of the market are not good enough to overcome the slow, challenging parts of the market. That's a struggle for just about anybody who is in consumer electronics."

And there's not a lot of room for a big upside on smartphones. For one, most Americans already have one. And screen sizes, which have driven prior upgrade cycles, are not likely to change that much.

"The phones are about as big as they're going to get," Baker said.

One area where Best Buy has made strides is in winning more purchases online. Online sales, which made up nearly 16 percent of Best Buy's fourth-quarter revenue, rose 14 percent during the holidays.

"They don't appear to be losing significant share to Amazon or to other online players as they were in the past, which is a plus," said Dave Marcotte, senior vice president of Kantar Retail.

Kavita Kumar • 612-673-4113