Adverse business conditions
In fiscal 2016, which ended January 30, 2016, Best Buy (BBY) experienced weakness in the mobile phone category and continued declines in tablet sales. On April 26, Apple (AAPL) reported a 16.3% drop in its iPhone unit sales in 2Q16 to 51.2 million units. Apple, along with Samsung (SSNLF), Hewlett-Packard (HPQ), Sony (SNE), and LG Electronics, were the five major suppliers for Best Buy in fiscal 2016. These five suppliers accounted for ~51% of the total merchandise Best Buy purchased in fiscal 2016. As we mentioned in Part 1 of this series, Best Buy’s fiscal 2016 sales fell 2% to $39.5 billion.
The computer and mobile phone category accounted for 46% of Best Buy’s Domestic Segment’s revenue in fiscal 2016, making it the largest product category. This category’s same-store sales fell 2.6% in fiscal 2016 due to a decline in tablet sales and lower demand for mobile phones. High smartphone penetration coupled with low consumer demand for the current product offerings has been hurting the company’s mobile phone sales.
The Domestic Segment’s second-largest category, Consumer Electronics, accounted for 32% of the fiscal 2016 revenue. The same-store sales of the Consumer Electronics category rose 4.7%, driven by higher sales of large-screen TVs, the expansion of Magnolia Design Center stores-within-a-store, and an expanded assortment of streaming devices. The SPDR S&P Retail ETF (XRT) has 1.1% exposure to Best Buy.
Expectations from fiscal 2017
The guidance issued by Best Buy in February 2016 anticipates a decline of 2.4% to 3.6% in the fiscal 2017 revenue. The softness in smartphone demand could continue to impact Best Buy’s revenue in fiscal 2017. However, the revenue from this category might grow if some compelling phone launches happen this year. The Consumer Technology Association (or CTA) estimates smartphone revenues will rise 4% in calendar 2016 to $55 billion. However, CTA expects tablet revenues to fall 12% to $18 billion in 2016.
Among the growth categories, CTA expects revenue from 4K ultra-high-definition televisions to rise 65%. The smart home technology category, which includes wi-fi cameras, smart locks, smart home systems, and smart switches, is expected to hit 8.9 million units in 2016, representing a 21% year-over-year growth. The smart home category revenue is expected to reach $1.2 billion in 2016. Wearables are expected to see strong demand in 2016. Fitness activity tracker volumes are expected to rise 12% to 17.4 million units and smart watch volumes are expected to increase 28% to 13.6 million units.
We’ll discuss Best Buy’s online business in the next part of this series.