(Bloomberg) — Best Buy Co. cut its profit and sales outlook, saying inflation is pummeling consumers and eroding demand for electronics.
Operating income will only be about 4% of revenue in the current fiscal year based on “current planning assumptions,” Best Buy said in a statement Wednesday. The retailer had previously expected at least 5.2%. Comparable sales will tumble 11%, versus an earlier forecast that they would fall no more than 6%.
Best Buy’s worsening outlook hammers home the pressure on discretionary purchases as the highest inflation in four decades forces US consumers to spend more for basic goods. Walmart Inc. issued a profit warning earlier this week that stoked fears of a recession, saying shoppers were pulling back from big-ticket purchases and items such as clothing. Target Corp. cut its profit outlook last month.
“As high inflation has continued and consumer sentiment has deteriorated, customer demand within the consumer electronics industry has softened even further,” Best Buy Chief Executive Officer Corie Barry said in the statement.
The shares fell 2.3% in late trading on Wednesday, paring much of their sharp decline immediately after the announcement. Best Buy had tumbled 27% this year through the close, while an S&P 500 index of consumer-discretionary companies sank 25%.
In the second fiscal quarter, which ends July 30, operating income will be about 3.7% of revenue, Best Buy said. Comparable sales will drop approximately 13% and inventory will be little changed from its level a year earlier. The company is scheduled to report full results on Aug. 30.
The dour short-term assessment contrasts sharply with the upgraded fiscal 2025 outlook Best Buy unveiled in March, when it outlined expected gains from its membership program, remodeled stores and new services in health care and digital advertising. While those goals aren’t out of reach, the company faces a harder slog this year.
Increased Discounts
What’s bad for Best Buy may be good for its customers, because the retailer predicted “increased promotional activity” for consumer electronics. Still, it’s unclear how much appetite is left for televisions, computers and other gadgets after shoppers binged on such goods earlier in the pandemic. Now, many are eager to spend on activities such as eating out and traveling, which were previously off limits.
Best Buy’s decision to cut its sales forecast underscored the weakness in electronics. Walmart and Target — which sell groceries and a wide selection of other goods as well as electronics — didn’t cut their sales projections.
The merchandise Best Buy sells isn’t necessarily getting more expensive. Television prices, for example, dropped 13% during the 12 months ending in June, part of a broader drop in video and audio goods, according to the US Labor Department. Computer prices were little changed.
But with food and fuel costs soaring over the last year and the overall price level way up, there’s less money left over for discretionary purchases. Faced with “ongoing uncertainty as it relates to macroeconomic conditions and consumer electronics demand,” Best Buy said it had paused share buybacks while remaining committed to its quarterly dividend.
“It is difficult to assess the duration of the softer sales environment and the impact on our business,” Chief Financial Officer Matt Bilunas said.
(Updates with second-quarter forecast in sixth paragraph)
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