Slower growth in smartphones dampens Best Buy's holiday; stock falls sharply

Best Buy can't seem to "win the holidays" with investors.

That slogan was the theme of the Richfield-based electronics retailer's 2015 holiday ads and was often used as a rallying cry by executives. But for the third year in a row, the announcement of its holiday sales led to a sell-off its shares.

On Thursday, Best Buy's stock tumbled 9.7 percent to its lowest level since May 2014 after the company announced a 1.4 percent drop in U.S. same-store sales during the nine weeks ended Jan. 2.

It was the company's first sales decline in more than a year and was a bit of a setback to the company's multiyear turnaround efforts.

The results also illustrated Best Buy's vulnerability to the ups and downs of product cycles. While executives had earlier warned about an industrywide decline in consumer electronics during the holidays, they said smartphone sales came in even lower than expected amid a lull in exciting upgrades from Apple and Samsung.

"Best Buy and the industry is having a tough time lapping the massive smartphone refresh cycle that happened (in 2014) around the iPhone 6 launch," said Peter Keith, an analyst with Piper Jaffray. The iPhone 6S released last September, Keith said, "just didn't drive that refresh or buying cycle like it did a year ago."

The stock sell-off, he added, is likely a reflection that listless smartphone sales will likely continue through the first half of the year.

"That dynamic probably doesn't change until the fall at best — that would be in conjunction with the launch of a new iPhone," he said.

Chief executive Hubert Joly told reporters that Best Buy outperformed the rest of the consumer electronics industry, which experienced a 4.8 percent drop during the holidays, according to market research firm NPD Group. (That metric does not include smartphones.) He added that he expects the company will end the fiscal year with an overall growth in sales.

"This would be the second year in a row where we've grown comparable domestic sales," Joly said. "We have certainly stabilized and improved the business."

By comparison, another electronics retailer, hhgregg, which chiefly operates in Eastern U.S. states, reported an 11 percent drop in sales in its most recent quarter, which included the holiday period.

In recent years, Best Buy's annual January announcement about holiday sales has led to big drops in its stock price, even when the results were fairly good. A major sell-off came with the January 2014 report of lower holiday sales in 2013, a year in which its stock had more than tripled. And a sell-off happened last January when Best Buy reported a 2.6 percent holiday sales gain. Investors were spooked that time by Best Buy's dreary forecast for the first half of the year.

Thursday's sell-off follows a year in which Best Buy's stock lost about a quarter of its value amid concerns about a dry spell in consumer electronics.

While Best Buy lowered its sales guidance for the full 13-week quarter, which runs through this month, Joly noted that the company was at the same time raising its profit outlook as executives have put tighter controls on expenses and held back on price promotions.

"We don't need to chase every rat in every rat hole," Joly said.

Charlie O'Shea, an analyst with Moody's, said that strategy may have taken away from some of Best Buy's top-line growth in the quarter, but it yielded healthier margins.

"We continue to hold the view that this is a really solid business," O'Shea said. "But at the end of the day, when you're a retailer, you're a slave to what you sell. You have to bob and weave."

Excluding smartphones, Best Buy was able to grow the rest of its business. The retailer called out fitness trackers. smartwatches, appliances and TVs as strong sellers during the holidays. Executives added that Best Buy sold half of all ultrahigh definition — or 4K — TVs.

During the holiday season, Best Buy also took an aggressive stance on free shipping, waiving its $35 mimumum requirement on order size to qualify for it.

But that promotion did not lead to a huge jump in online sales. Online sales grew 12.6 percent during the holidays, compared with 13.4 percent the year before. Joly noted that most products Best Buy sells are already above the $35 threshold.

Kavita Kumar • 612-673-4113