May 24, 2012, 4:06 PM

Best Buy will keep shrinking stores to grow online

E-commerce sales grew 20% in Q1 while store sales dropped 5%.

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Given its dismal first quarter performance, Best Buy Co.’s interim CEO Mike Mikan isn’t mincing words about the company’s future.

Mikan told Wall Street analysts this week that Best Buy is no longer as relevant to customers with its current business model, and will continue to emphasize e-commerce and smaller stores to reshape its future. “The annual rate of growth of e-commerce transactions is far outstripping traditional retail sales,” Mikan told analysts on the company’s first quarter earnings call. “Consumers have needs and preferences that are new and changing rapidly. Today, they need virtual products and services as much, if not more, than they need hardware. And businesses are under pressure to respond to those changes; to connect with consumers, whether they are online or in the store; and to meet these new needs and preferences.”

In the past Best Buy could count on its network of big-box stores and experienced salespeople to drive growth. But now the retailer is in a turnaround mode, Mikan said. “Best Buy provided a unique customer experience that gave us a clear edge over competitors, but not anymore,” Mikan told analysts. “Today's marketplace is different. From my perspective, it is a marketplace we weren't prepared for. Best Buy's customer experience is no longer unique as it once was, and it is no longer a distinct competitive advantage.”

Going forward and as a key part of its turnaround strategy, Best Buy will continue to growth its e-commerce base, focus on a smaller-store format such as Best Buy Mobile that sells cell phones and close more big-box stores. “We will right size the company to better meet customers wherever they want, whenever they want, in the neighborhood store or online with a strengthened e-commerce capability that opens markets at home and abroad,” Mikan told analysts. “My goal is to continue to shrink the company's physical footprint and substantially reduce our cost structure. Total square footage will go down as we make decisions about the best use of space and resources.”

Best Buy has aggressive plans to implement more e-commerce initiatives, but the company also has to improve its finances, Mikan said.

For the first quarter ended May 5, Best Buy, No. 11 in the 2012 Internet Retailer Top 500 reported:

  • An increase in e-commerce sales of 20%, but didn’t release dollar figures.
  • Total sales increased 2.2% to $11.61 billion from $11.36 billion.
  • Comparable-store sales decreased 5.3%.
  • Net earnings decreased 25.5% to $158 million from $212 million.

In the first quarter Best Buy dealt with the departure of CEO Brian Dunn, who resigned after the company’s board concluded that he conducted an inappropriate relationship with a female employee. On the earnings call Mikan says Best Buy dealt with the situation in an upfront matter. “The board kept a promise to resolve this matter openly and with full transparency,” Mikan told analysts.

As Best Buy looks to recalibrate its approach to merchandising, Mikan said it will be making other changes, such as refocusing its repair and service arm, Geek Squad, into an organization that builds long-term technology shopping and services relationships with consumers. Best Buy also will continue to grow e-commerce, but details will be released at a later date, Mikan told analysts. “We must have a world-class e-commerce capability,” Mikan said. “We are continuing to build a first-rate team to help Best Buy meet that need, and I expect to have more to say about that real soon.”

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