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Digiday Media Digiday Glossy Custom. Best Buy. During the calendar year , Best Buy opened nine more stores in Chicago, for a total of 23, to solidify its leadership position in the Midwest, and entered the key Circuit City markets of Atlanta and Phoenix with an additional 13 stores.
Numerous other openings, including a small number of megastores 40, to 50,square-foot self-service warehouses emphasizing the emerging growth lines of prerecorded music and computers , brought Best Buy's tally to stores by year-end At that point the only internal factor seriously saddling the company was a hefty 43 percent debt-to-capital ratio.
Best Buy's "push" distribution system, however, in which products are automatically shipped to outlets based on computer analysis of past sales trends, along with its rapid turnover time and its expectation of rising sales per store, indicated that the company could hold its costs while continuing to expand. Its greatest concern for the future was the bottom line impact of Circuit City's latest moves.
Just as Best Buy had looked to the outer corridors of the country, Circuit City had looked inward. It, too, had embraced Chicago, where price wars began anew. By both superstore titans had virtually vanquished the remaining competition, which included such former number two retailers as Highland Superstores forced to liquidate and Dixons Group's Silo Holdings forced to downsize and sell to Fretter Inc.
Best Buy's growth had been nothing short of spectacular. From to corporate sales rose annually by 23 percent, while the industry as a whole expanded by a yearly average of just 3 percent. Although Circuit City was a significantly larger and more stable company in the eyes of investors, with a history of wider profit margins and negligible debt, it was Best Buy that generated the most excitement on Wall Street.
With excitement, however, came volatility: in the stock nearly doubled within a three-month period but then dropped by 10 percent in a single day in mid-November. Part of this roller-coaster pattern stemmed from Best Buy's increasingly heated battle with Circuit City, which had many analysts wary.
Competition with Circuit City remained fierce, with Best Buy challenging its archrival by entering its traditional strongholds in California, Washington, D. The head-on clash prompted renewed price wars, which Best Buy was positioned to withstand because of its low cost structure. Lowered prices, however, meant lower earnings for Best Buy. In the meantime, Best Buy moved forward with the introduction of its larger Concept III stores, which were 45, to 58, square feet in size and offered customers a greater selection of products and more information, particularly through hands-on displays.
The company's strategy of cutting service to help offer lower prices continued to cost the company suppliers. By the electronics manufacturer Hitachi had stopped supplying Best Buy, as had the appliance maker Kenwood. In addition, Whirlpool pulled its top-line Whirlpool brand from the store, although it continued to supply its lower-priced Roper brand. President of Mitsubishi Consumer Electronics America Jack Osborn explained to Forbes in that his company chose to sell through smaller retailers because they offer better service and cannot use their size to pressure Mitsubishi into offering lower wholesale prices.
Osborn said at the time, "We will not be in a national chain. In an effort to reverse this trend, Best Buy announced in that it would revamp its merchandising format for high-quality audio products. Brad Anderson, the president of Best Buy, told Forbes that the move was needed because, "We could not land some of the products we wanted. Despite these problems, Best Buy continued to broaden its territory and bolster market share.
In the company added 47 new stores and moved into new areas, including Miami and Cincinnati. By late Best Buy was breathing down the neck of Circuit City in terms of market share.
With 8. The company added almost 50 new stores in and moved into additional new territories, including Philadelphia. This decline forced Best Buy to rethink its product offerings. For instance, the company began offering cut-rate compact discs in as a loss leader and pushed the idea in the mids.
Although people bought the low-priced discs, they did not stay to purchase the big-ticket, high-margin items. In the company cut back its CD selection and raised the remaining titles' prices slightly. It also added an assortment of books and magazines to its entertainment section.
In addition, it decided to concentrate on higher margin items, such as computer peripherals, high-end appliances, and service plans. Soon after the products began arriving at the stores, chipmaker Intel Corporation announced plans to introduce its latest chip, a Pentium featuring MMX technology designed to improve the multimedia performance of personal computers.
Demand for existing computers running earlier generation processors fell almost immediately. In early , saddled with mountains of unsold PCs, Best Buy had to ask its creditors and vendors for an extra 60 days to pay its bills. Schulze, however, brought in outside consultants from Andersen Consulting LLC for advice on a range of areas.
Significant changes were made to the product mix, particularly by eliminating slower selling product lines and models; a greater emphasis was placed on selling service plans to customers; and "high touch" areas were added to the stores to help sell the burgeoning array of digital consumer products, such as cameras, cellular phones, satellite systems, and the fast-selling DVD player first introduced in for which customers often needed more assistance.
The management team was also overhauled; 40 new vice-presidents were hired, most coming from the outside and replacing much of the company's old guard. While this restructuring proceeded, the chain's expansion was slowed considerably, and only 12 new stores opened during the fiscal year ending in February The changes that were implemented succeeded in turning the company around.
In March Best Buy officially entered the e-commerce realm by launching an online music store at its bestbuy. Later in the year the company unveiled its Concept IV format. Typically sized between 43, and 45, square feet--actually slightly smaller than the previous model--these stores featured more high-tech products, had a more open layout with products grouped in such departments as home theater and digital imaging, and added cash registers throughout the store.
The recently introduced "high touch" areas were retained, and additional hands-on features were added to the car audio section, where customers could now listen to different audio components in a "Boom Room" and a "virtual car. Best Buy's stock leaped percent, prompting another two-for-one stock split in March During the next fiscal year, 47 more stores were opened, bringing the total to , as the chain moved into the major California markets of Sacramento, San Diego, and San Francisco, and also into Richmond, Virginia.
Best Buy also introduced a new and smaller, 30,square-foot format designed specifically for markets with populations under ,
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