Tariff concerns sink Best Buy's shares as company works to mitigate effect

While Best Buy and its vendors are working hard to mitigate the effect of upcoming tariffs on TVs, headphones and computers made in China, the company's investors remain concerned.

The Richfield-based electronics chain's shares sank 8% Thursday after the retailer lowered the top end of its revenue forecast for the year, citing the uncertainty of consumers' buying behavior as a result of the country's ongoing trade war with China as well as the slowdown in sales of gaming consoles.

"It is hard to predict how, at the macro level, consumers will react to higher prices resulting from tariffs," Best Buy CEO Corie Barry told investors after reporting better-than-expected profit but fewer-than-expected sales in the second quarter. "As you would imagine, the overall general volatility in the markets adds to our level of caution in our outlook."

She said the company was pleased that the Trump administration delayed some tariffs, on items such as computers, mobile phones and gaming consoles until mid-December, lessening the effect on those products this holiday season.

But other tariffs on TVs, smartwatches, headphones and other products are slated to go into effect in September.

Still, Barry said it's not yet clear whether consumers will see higher prices on those products this holiday season. Best Buy already has purchase agreements in place with a lot of vendors and has been bringing in products ahead of the tariff implementation dates. The company also is changing some of its vendor and product assortment and working on promotions and pricing to further reduce the impact.

At the same time, she said Best Buy is seeing its vendors shifting operations outside of China to countries such as Vietnam, Taiwan, South Korea and Mexico.

"I think everyone agrees there was a lot of reliance on China, especially in [consumer electronics]," she told reporters. "And so we're seeing that shift start as soon as today."

As a result, while 60% of Best Buy's business is potentially affected by the current and upcoming list of tariffs, Barry said she expects that to drop to 40% by next year because of manufacturers' migration. The actual effect will be much smaller given the company's mitigation efforts and the fluidity of the regulations as some vendors and products are being exempted, she added.

While Best Buy narrowed its revenue forecast for the year, it raised its profit outlook after a better-than-expected performance in the first half of this year.

"Despite uncertainty surrounding potential tariffs, Best Buy's raising of guidance indicates that it believes it can weather whatever tariff situation results with minimal upset," Moody's analyst Charlie O'Shea said in a statement.

On Thursday, the company posted second-quarter adjusted earnings of $1.08 a share, which beat analysts' expectations by 9 cents, as the company cut costs to improve profitability.

But its overall quarterly profit dropped 2.5% to $238 million due to a $48 million restructuring charge in the quarter from changing the store operating model. Executives said the changes are aimed at simplifying processes and giving store leaders more power to make decisions at the local level. Barry acknowledged to reporters that this also resulted in some jobs being eliminated, but she did not provide a number.

In the May-to-July quarter, Best Buy's revenue rose 1.7% to $9.54 billion, just below analysts' expectations, and was dragged down a bit by softer sales in Canada. Comparable sales in the May-to-July quarter rose 1.6%, on top of 6.2% growth in the same quarter a year ago.

Sales were boosted by growth in appliances, tablets and headphones, which helped make up for declines in gaming and home theater equipment.

On a call with investors, Barry noted that Best Buy has recently completed two "tuck-in" acquisitions, building off its $800 million purchase last year of GreatCall, a mobile device and emergency call service for older adults and their caregivers.

It bought Michigan-based Critical Signal Technologies at the end of last quarter to help it more quickly scale its commercial monitoring business. And earlier this month, it bought Massachusetts-based BioSensics, a health care technology business that focuses on wearable sensors. Barry said Best Buy was interested in bringing on board BioSensics' data science and engineering team.

As part of its bigger focus on health, Best Buy also is selling a new collection of connected health products that includes cycling bikes and rowers that are available on its website and will be rolled out to 100 stores by the end of this year.

Barry said the company has seen a promising start to a new lease-to-own program it began rolling out this year. The program, aimed at people who don't qualify for its credit card or don't want credit cards, is already in 36 states and will be expanded to nine more, including New York and California, in the coming months. It has been especially appealing to consumers buying computers, she said.

Best Buy is now an authorized Apple service provider chain wide after starting out with 200 stores in 2017. Barry said the initiative, which now sends customers to Best Buy stores from Apple's website, is bringing new customers to its stores as well as those who haven't shopped at Best Buy in awhile.

In June, Barry took over the helm of the Best Buy from Hubert Joly. Joly is now executive chairman of the board.

Kavita Kumar • 612-673-4118