The nation's biggest electronics retailer had performed relatively well throughout the economic downturn in part by touting its customer service prowess and because shoppers were snapping up new smartphones and notebook computers as soon as they hit shelves.
But on Tuesday, Best Buy posted second-quarter profit that plunged 30 percent, sales that missed Wall Street estimates and the company lowered its forecast for the year as new smartphone and notebook launches slowed and customers continued their exodus from its big-box stores to shop for deals on electronics at online retailers, discount stores and specialty chains.
"The consumer is willing to trade customer service for the best possible price," said Brian Sozzi, a Wall Street Strategies analyst. "Their problems aren't going away; if anything, they're accelerating."
When its now-defunct rival Circuit City went out of business about a year ago, Best Buy reaped the benefits of being the biggest kid on the block. But Tuesday's results shows Best Buy is being hurt by Americans' continuing worries about the global economy. They're cutting back on discretionary purchases of TVs and looking for discounts at retailers such as Wal-Mart when they do buy. They also increasingly dislike the unwieldiness of big box stores, preferring instead to shop online at Amazon.com or in smaller specialty stores like GameStop.
"Results in the second quarter and our outlook reflect continued macro challenges to overall consumer spending and lower consumer electronics industry sales," said Brian Dunn, Best Buy's CEO.
To compete with the likes of Amazon and others, Best Buy has beefed up its online presence and worked to reduce its square footage space by 10 percent over the next three to five years. It's also working with landlords to close up to 30 stores when their leases expire in 2012.
Additionally, the retailer is focusing on promoting its customers service from its employees, who it calls "blue shirts." A Twitter campaign called "Twelpforce" offers advice through the social media site. And its "Geek Squad" pays house visits to set up computers and TVs.
"This world isn't moving to a place where it's digital all by itself or physical all by itself; neither alone will be sufficient," Dunn said. "What we firmly and fanatically believe is that where those things come together is in multi-channel so you can be where the customer needs you to be, wants you to be, when they need you there."
But the changes have not been enough for some shoppers. Take Sara Pereda, a 30-year-old New York talent agency worker who bought a TV in 2008 at Best Buy. Now, she buys all of her electronics at Costco, including a 42-inch TV and Blu-Ray player she recently purchased for $650. She said the total bill for the devices would have been $300 more at Best Buy.
"They're usually cheaper than Best Buy," she said of Costco. As shoppers like Pereda searched for electronics deals elsewhere during the second quarter, Best Buy said revenue at stores open at least one year - a key gauge of a retailer's health - fell 2.8 percent. Best Buy said sales of tablet computers, appliances and e-book readers were strong during the quarter, but sales of TV and videogames were weaker.
Mobile revenue also dragged down results. Best Buy had a 5 percent drop in mobile-phone related revenue in stores open at least one year. The company said results were hurt by the lack of a major smartphone introduction. In fact, revenue during last year's second-quarter rose 3 percent, benefiting from the launch of the iPhone 4 and the HTCEvo.
"We anticipate a stronger line up of new handsets in the second half and continue to expect that this business will deliver its top line and profit goals for the year," said James Muehlbauer, Best Buy's CFO.
Morningstar analyst Peter Wahlstrom is skeptical. "Even though they say they're gaining market share in mobile, it's pretty clear they're losing market share in other places," he said.
Best Buy Co.'s net income fell to $177 million, or 47 cents per share, for the three months ended Aug. 27, down from $254 million or 60 cents per share in the same period last year. Revenue edged up to $11.35 billion from $11.34 billion. Results missed analysts' expectations of earnings of 52 cents per share on revenue of $11.47 billion, according to a survey by FactSet.
Best Buy, based in Minneapolis, also lowered its guidance for the year. It now predicts 2011 earnings of $3.35 to $3.65 per share. That includes a benefit from share repurchases of 20 cents to 25 cents per share. Excluding that, the outlook is lower than its previous guidance of net income of $3.30 to $3.55 per share. Analysts, who typically exclude one-time items from their estimates, expect earnings of $3.45 per share.
The company reaffirmed revenue guidance of $51 billion to $51.2 billion. Analysts predict revenue of $51.99 billion.
Best Buy shares fell $1.71, or 6.8 percent, to $23.26 during trading, after earlier falling to a 52-week low of $22.74. The stock traded as high as $45.63 late last November.