Best Buy Struggles To Gain as Recession Weights Against Circuit City Demise

Best Buy is caught in a recessionary malaise and, while effectively managing operations, it’s stuck in a tough spot as the main rivals the company faces now a days have more than electronics to lure frugal consumers into stores.

In the first quarter ended May 30, repair services – the kind of operation that gains in a recession, as auto supplies chains know — turned out to be among the best performing segments of the electronics chain’s business, along with notebook computers and mobile phones, with the new generation of hard-to-resist smart phones gaining sales through the year they might have gotten around the 2008 holidays if the economy had been better.

Best Buy suffered a comparable store sales decline of 6.2 percent in the quarter and earnings slipped from 42 cents per share – not counting a one-time six cents per share restructuring charge — from 43 cents in the year-previous period, but profits beat First Call analyst average expectations.

As it released its quarterly results, the company emphasized that it has been gaining market share, a common goal among recession-rattled retailers. Best Buy stated a belief that its market share expansion in the United States accelerated during the quarter, growing nearly 200 basis points, or two percent, for a three-month tracking period ended April 30. Market share gains were led by notebook computers, flat-panel televisions, digital imaging and mobile phones, the company stated, adding that those gains accelerated in March and April as the it realized benefits from changes in the competitive environment – basically the demise of Circuit City – and from transitions to new product models accomplished earlier than its rivals. The company didn’t say if the market share gains continued in May, when it was up against comparisons to a month last year when government stimulus checks were reaching consumers.

Best Buy also noted that its domestic revenues increased while U.S. consumer electronics industry sales taken as a whole declined by the low double-digits.

While it is doing better and expects comparable store sales declines to moderate in the second half of the year, Best Buy’s results still aren’t strong enough to really celebrate, in part because its market share gains are coming in the aftermath of Circuit City’s liquidation, which would throw customers in its direction by default. The question becomes, can Best Buy continue to make market share gains particularly as Wal-Mart, Target, Costco and even some bargain retailers such as Duckwall-ALCO expand their electronics operations? Also, add Amazon.com to that list and the relaunched Circuit City web site, which now is live. It’s ability to capitalize during this year’s holiday season and continue adding share would indicate that the company really is gaining ground, otherwise results would suggest that Wal-Mart and other non-specialists are winning over consumers.

Morgan Stanley analyst Gregory Melich pointed out in a research note that the 200 basis point increase in market share could be attributed largely to eight percent growth in store square footage in the quarter. He added that weak store traffic drove a comp decrease that was larger than planned as fewer customers entered Best Buy stores, although declines, as might be predicted given the stimulus-impacted comparison, were highest in May. While international took more of a beating, U.S. comps declined by 4.9 percent driven by traffic reductions, he stated, as average sales per customer were flat. Margins were strong and inventories well managed, Melich asserted, but he suggested that Best Buy would have to get more consumers through its doors and, so, report higher traffic, before he would view it as gaining.