The Ratings Game: Best Buy expects to shutter more than 20 stores this year with many more on the chopping block as business evolves to online

United States

Best Buy Co. Inc. BBY, -1.52% is adjusting its business to meet new consumer online shopping habits brought on by COVID-19, including a plan to shutter more than 20 stores this year, and possibly many more in the years to come.

Chief Executive Corie Barry said on the company’s fourth-quarter earnings call that the consumer electronics retailer has closed about 20 large-format stores in each of the last two years, and the company expects “to close a higher number this year.”

The company has about 450 leases coming up for renewal over the next three years, about 150 each year. Barry said there will be “higher thresholds on renewing leases as we evaluate the role each store plays in its market,” according to a FactSet transcript.

Read: National Retail Federation forecasts 2021 retail sales growth between 6.5% and 8.2% as COVID-19 vaccine continues roll out

Even as Best Buy evaluates which stores to keep, the company has plans to revamp locations to help fulfill orders from its thriving online business.

Best Buy reported a comparable online sales rise of 89.3%, and nearly two-thirds of online revenue was picked up in-store or curbside, shipped from a store, or delivered by a store employee.

“In the fourth quarter, the pandemic drove a roughly 15% reduction in traffic to our stores, including both in-store shoppers and customers picking up online orders via in-store or curbside,” Barry said.

“And while some traffic will likely shift back to our store channel in fiscal 2022, like many retailers, we believe much of what we saw last year will be permanent.”

During the quarter, about 340 stores, about 35% of locations, were used to manage 70% of ship-from-store items. The company plans to use a smaller group of stores as hubs for this activity in the future.

And Best Buy is planning to reduce the selling floor in a portion of these stores and install “warehouse-grade packaging” equipment.

The company is also testing alternative layouts in the Minneapolis market.

The changes to the business also extend to staffing. While the company announced bonuses for hourly workers in the coming weeks, the company laid off 5,000 workers this month, the majority of whom worked full-time.

See: Best Buy says it laid off 5,000 employees this month

The company plans to add 2,000 part-time workers.

“Over the past year, thousands of employees who possess unique skills were leveraged across multiple areas of our business, like virtual sales, chat, phone and remote support,” Barry said.

Best Buy started fiscal 2021 with 123,000 employees and ended with 102,000, a reduction of 17%. Barry said most of these reductions were the result of attrition.

“In our view, with a -20% year-over-year reduction in employees in early February, there is potential for even lower SG&A growth in 2021, with discretionary investment spending on technology and the company’s health business a key variable,” wrote Wedbush analysts.

“Bigger picture, reducing and reconfiguring the company’s labor and repositioning its real estate are key to our illustrative example of ~$ 90 million in occupancy savings and ~$ 500 million in labor savings that could boost EPS by ~30%.”

Wedbush rates Best Buy stock as outperform with a $ 135 price target.

“Going forward, we think there will be questions on margin sustainability as sales growth decelerates and online sales remain elevated,” wrote UBS analysts.

“Though we think is taking the steps necessary to align its store operating model with a more digital future. Notably, we think the consumer electronics category is at risk of demand pull-forward and wallet share regressions as we trend towards reopening.”

UBS rates Best Buy stock as neutral with a $ 120 price target.

Raymond James downgraded Best Buy shares to outperform from strong buy based on valuation and challenging comparisons. But analysts remain upbeat about the retailer.

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“[W]e believe Best Buy is increasingly becoming a FY23 (CY22) story as productivity gains from store closures and fulfillment efficiencies along with greater revenue potential in the higher-margin service business start to take center stage,” analysts led by Bobby Griffin wrote.

“We remain firm believers that innovation in consumer tech and telehealth should accelerate further following COVID-19’s impact — enhancing both Best Buy’s products and services inherent value over the long term.”

Raymond James lowered its target price to $ 120 from $ 150.

Best Buy stock was down 2.1% in Friday trading, but has gained 22.6% over the past year. The benchmark S&P 500 index SPX, -0.08% has rallied 22.9% over the last 12 months.