BB's crying the blues today.
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. ^REUTER@
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