Best Buy making changes to shift retailer further toward 'digital-first'

Throughout the pandemic, Best Buy has adjusted because it had to — expanding curbside pickup, adapting hours, redesigning stores. This year, the Richfield-based electronics chain says it must make more strategic changes because the shift to online shopping is here to stay.

Executives said Thursday as they announced a strong fourth-quarter financial report that customer behavior is driving the company to become even more "digital-first." They also predicted that they could face slowing sales as consumers shift back to spending in areas such as travel and dining out.

They confirmed cuts to their workforce in brick-and-mortar stores, hinted at possible future changes to store count and layout and further investments in health technology.

"We know that the customer has completely changed the way that they are thinking about shopping, and with that big of a digital shift happening in that short of a period of time, we have been doing everything we can to adjust to the new reality," said Chief Executive Corie Barry in a call with reporters.

Digital sales increased about 90% to $6.7 billion during the fourth quarter over the same period a year ago — a record for the period that includes holiday sales.

But there was a 15% reduction in traffic to stores, Barry said.

"While some traffic will likely shift back to our store channel [this year], like many retailers, we believe much of what we saw last year will be permanent," Barry said.

There will be a higher threshold to renew store leases in the future, Barry said. Best Buy has closed about 20 large-format locations each of the last two years and expects to close a higher number this year.

Best Buy also confirmed that its head count had dropped from about 123,000 across the organization at the start of the fiscal year to roughly 102,000 near the end, which Barry attributed primarily to attrition and the company leaving some positions open.

During the start of the pandemic, Best Buy furloughed around 51,000 employees but brought two-thirds of the staff back to work later in the year with the rest offered seasonal jobs.

Earlier this month, though, Best Buy decided to lay off about 5,000 employees, mostly full time. The company said it is adding 2,000 part-time jobs.

Barry said company leaders felt they had to adjust the workforce "to match that new reality" of online sales being a bigger part of the picture.

Throughout an unprecedented year that was hurt by COVID-19, Best Buy rapidly changed its operations as consumer habits and public health restrictions shifted. The chain chose to temporarily close its stores to traffic last March and offer curbside pickup while later reopening in later months. In the fall, it began to alter its fulfillment strategy, turning about a quarter of its locations into store hubs meant to handle more online volume.

At the end of the fourth quarter, 35% of Best Buy stores had switched to the hub model. Those 340 stores handled 70% of ship-from-store orders.

In the future, Barry said company leaders think the number of store hubs could be consolidated. A subset of those stores could be remodeled to reduce the in-store sales space and add more room and equipment to help with fulfillment.

A handful of Twin Cities stores were redesigned late last year to decrease shoppable square footage and rework its fulfillment space.

"We're definitely liking some of what we are seeing," Barry said about the Twin Cities pilot, though she said it was too early to give details.

In the next fiscal year, Best Buy also plans to expand its health technology offerings. These include items for consumer health such as wearables to track fitness goals as well as products that could help seniors stay in their homes longer and connect them with emergency responders and others that allow for patients and health care partners to connect virtually.

Neil Saunders, managing director of data analytics firm GlobalData, said he thought it was smart for Best Buy to continue to invest in health care products and services.

"It diversifies them away from core electronics retail and just gives them another string in their bow, which I think is very helpful going forward," Saunders said.

While the company did not give traditional financial guidance for this fiscal year, executives acknowledged a possible slowdown that could occur as pandemic fears recede and consumers resume spending in areas such as travel and dining out. Sales for the year could range from falling 2% to increasing 1%, they said.

Net income for the fourth quarter was $816 million, or $3.10 a share, up nearly 10% over the same period a year ago. Overall revenue was up 11.5% to $16.9 billion.

During the fourth quarter, computing items, appliances and gaming were the most popular items for customers as they celebrated the holiday season.

Despite Best Buy's growth, its share price was down 9.3% for the day with it not meeting Wall Street revenue estimates.

Despite the negative reaction on Wall Street, which he calls "irrational," Saunders said the company delivered strong growth for the quarter though sales are expected to droop this year.

"Things have started to slow a little bit partly because people have bought a lot of things already, especially in electronics," he said. "We had a boon year in 2020 and people were buying televisions, things for their home, laptops for working from home."

Nicole Norfleet • 612-673-4495

Twitter: @nicolenorfleet