Coming off a so-so quarter, Best Buy signals challenges for the holiday season

After a great summer, autumn turned difficult for Best Buy Co. as a downward trend in electronics slowed sales in its fiscal third quarter.

In announcing results Thursday, the retailer's top executives also expressed caution for the holiday shopping season, which typically generates more than half of the electronics chain's profits and a third of its sales. They forecast flat sales in the fourth quarter.

The muted outlook comes on the heels of other big retailers, such as Wal-Mart and Macy's, recently lowering their forecasts for the year. Still, overall retail sales are expected to grow between 2 and 4 percent during the holidays.

Consumer electronics, which often sell well during the holidays, were challenged during the August to October period. Target Corp. reported on Wednesday a double-digit percentage decline in electronics sales in the quarter.

Best Buy executives noted that consulting firm NPD tracked a 4.3 percent decline in consumer electronics — categories that account for about two-thirds of Best Buy's revenue — in the third quarter. They expect those industry declines to continue at a similar clip in the fourth quarter. But they remained upbeat on their ability to ride out the softness as they have at other times this year.

"Who cares what the industry is going to do?" Hubert Joly, the company's chief executive, said in an interview. "We're going to take advantage of every customer opportunity and win and gain marketshare … This is the mind-set of a winning team — as opposed to being 'Oh my god, the industry is down.' Who cares? We can win and that's what we're doing."

In the last few years, Best Buy, which is based in Richfield and is in the midst of a multiyear turnaround, has been working to differentiate itself by building in-store shops to highlight products of brands like Samsung and Sony. It also has focused on the training of its blue-shirted employees to offer better customer service.

Joly added that categories not included in the NPD index but that are an important part of Best Buy's portfolio include mobile phones, appliances and gaming.

"By the way, those are three growing categories," he said.

By contrast, Best Buy experienced one of its strongest quarters in five years from May through July, posting better-than-expected results for that period.

On Thursday, Chief Financial Officer Sharon McCollam said the sales trends grew worse in October, a sign that consumers were holding off on making purchases in anticipation of Black Friday deals this month.

"Black Friday as we all know has become Black November and we know that has a particularly stronger impact on the consumer electronics category than other categories," she told analysts in a conference call.

Executives said large-screen and 4K TVs, wearable fitness items, connected and smart devices, and drones will be hot holiday items. Joly said he plans to buy a drone himself to check out the technology and to perhaps grab video of his performance on the tennis court.

Still, the cautious guidance around the holiday is "spooking investors," David Magee, an analyst with SunTrust Robinson Humphrey, wrote in a research note.

"We think that the broader holiday season is off to a weak start due to unusually warm weather and, to a lesser degree, geopolitical distractions," he said. "However, the season has a long ways to go, and [Best Buy] should continue to be a share gainer."

Best Buy shares fell 2 percent Thursday.

Analysts at Deutsche Bank noted in a report last month that while Best Buy's sales typically align with industry sales trends in electronics, that has changed this year with Best Buy reporting sales gains while the industry was down.

"This historical correlation has decoupled pretty significantly over the past two quarters, a function of strong market share gains from" Best Buy, they wrote.

Another challenge for Best Buy is that it is coming up against tougher comparisons from last year. Same-store sales rose 2.2 percent in the third quarter last year, its first sales lift in nearly two years. And its sales in the fourth quarter last year rose 2.8 percent.

In this year's third quarter, that growth slowed to 0.5 percent at U.S. stores. Revenue fell 2.4 percent to $8.8 billion.

Its adjusted profit, excluding the effect of one-time events and store closings, amounted to 41 cents, up from 34 cents in the same period a year ago and beating analysts' expectations of 35 cents.

Net profit in the quarter was $125 million, or 36 cents a share, up from $107 million, or 30 cents a share, a year ago.

Another bright spot was an 18 percent increase in online sales, which accounted for 8.8 percent of Best Buy's overall revenue in the quarter.

This holiday season, Best Buy is offering free shipping on any size purchase as a special promotion to drive more online sales.

In the interview, Joly acknowledged that the vast majority of Best Buy's products already qualify for free shipping since they are higher in price than the $35 threshold for free shipping it offers the rest of the year. He said the holiday promotion helps simplify that message to consumers.

And as it did last year, he said Best Buy will offer a free two-day shipping promotion closer to the holiday shipping deadline.

Kavita Kumar • 612-673-4113