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Subject: Re: why best buy sucks
Wednesday December 18 6:09 PM EST
Best Buy Posts Loss, Blames PC Price Wars
CHICAGO (Reuter) - Best Buy Co. Inc., one of the nation's largest
retailers of electronics, personal computers and appliances, became
the latest victim of the PC price wars Wednesday, reporting its first
loss in more than a decade.
As a result, the company said it failed to comply with terms of a loan
agreement with banks, involving $271.5 million in borrowings as of
Nov. 30.
Best Buy, with 272 stores in 32 states, posted a loss of about $11
million, or 25 cents a share, for its third quarter ended on Nov. 30,
compared with profits of $17.8 million, or 41 cents a share, in the
year-ago period. Revenues rose to $2 billion from $1.9 billion.
The loss was largely due to a pretax charge of $15 million, or 21
cents a share, to write down personal computer inventories. This was
mainly prompted by a drop in PC prices rather than excess levels of
inventory, Best Buy said.
"I think it is important for industry analysts to understand that
computer retailers are really taking a hit," said Susan Hoff,
spokeswoman for Minneapolis-based Best Buy. She said the 30-year-old
company has not reported a loss since before it became Best Buy Co. in
1983.
Analysts had expected lower profits for Best Buy for the quarter but
not a loss. Other computer retailers, such as Circuit City, have
already reported weaker earnings and sluggish personal computer sales.
According to First Call, analysts on average had predicted profit of
seven cents a share, excluding the one-time charges, vs. 41 cents a
share in the year-ago period.
While some analysts said they expected Best Buy to post a profit for
the current quarter ending in February, others said the company faces
more hard times ahead.
"We think in the first half (of fiscal 1998) the company will continue
to lose money in a significant way," said Piper Jaffray Inc. retail
analyst Saul Yaari, adding he cut his estimates for fourth quarter,
and fiscal 1997 and 1998.
Hoff said the company was in talks with its banks and expected to
resolve the credit agreement. "The wording in the bank agreement says
you need to make money in the third quarter to be part of the
agreement," she said.
Hoff noted that Best Buy has complied with the "clean down provision"
in the agreement, which requires the company to carry less than $50
million in debt.
"We don't think there is a question of bankruptcy here, but they will
pay higher interest rates," Yaari said.
Best Buy said its merchandise inventories fell to $1.85 billion as of
Nov. 30 from $1.97 billion a year earlier, even though it has added 21
new stores this year. This was almost entirely because the company
reduced stocks of PCs in anticipation of new models equipped with
Intel Corp.'s new generation multimedia chip due out in January, it
said.
"The concern is with the dawn of the MMX product," Hoff said,
referring to the Intel chip. "Can we expect the computer business to
come out of this lull? It's too early to tell."
Best Buy noted that new computers -- which were introduced in February
this year -- will be introduced six weeks earlier in the new year,
causing computer prices to decline during the busiest months of the
year.
Manufacturers and retailers were also promoting current models
aggressively to make way for the new models.
"The market for personal computers continues to be highly promotional
with sizable price reductions, free merchandise and financing offers
used to stimulate consumer demand," Best Buy Chairman Richard Schulze
said in a statement.
"This resulted in extreme margin pressure beginning in November and
continuing through December," he said.
Hoff said Best Buy was hit with weakness in three of its key
businesses -- personal computers, consumer electronics and
entertainment software.
"I think they are certainly a victim of the fact that demand has been
really weak in their businesses, and I think it's increasingly hard
for retailers who are not focused singularly on PCs to outmerchandise
and outsell folks who do that," said Dean Ramos at Dain Bosworth.
Best Buy stock fell 62.5 cents to $11.875 on the New York Stock
Exchange.
Reuters Limited
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