Sales of Best Buy Co Inc (NYSE:BBY) falling continuously

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By Chris Hillman on August 27, 2014 Consumer Staples

Decline in same store sales and discount offers have been detected as the major reasons behind the expected fall in profit margins of Best Buy Co Inc (NYSE:BBY), in the second half of the year.

On Tuesday alone, the shares of the largest retailer of electronics witnessed a 7 percent drop in its shares. Moreover, the revenue for the third quarter is much lower than what was estimated at the beginning of the year. Along with a decline in the demand for electronics, there has been a shift towards purchasing electronics from online stores. As a result, companies like Best Buy Co Inc (NYSE:BBY) have to face fierce competition.

Since the beginning of this year, there has been an increasing pressure due to an increased sale of items online, which has been worsened by the discount offers by online stores in the US.

By the end of the second quarter of the current fiscal year, same store sales had declined by 2.7 percent; analysts had just predicted this value to be around 2.2 percent. On the other hand, operating margin of the company dropped to 2.7 percent from 4.5 percent.

Competition from online retailers such as Amazon.com, Inc. (NASDAQ:AMZN) is increasing each year, which has caused the profit margins of Best Buy Co Inc (NYSE:BBY)to decline continuously from over the past 14 quarters. According to reports, there has been an increase of 30 percent in the sales of electronic items from Amazon.com, Inc. (NASDAQ:AMZN).

Although Best Buy Co Inc (NYSE:BBY)decided to decrease its prices last year to compete with online stores, it failed to attract consumers and suffered a heavy loss.

According to a popular survey, 42 percent who plan to purchase electronic items plan to do so from online stores. This percentage has increased from 15 percent a year ago.

Experts believe that Best Buy Co Inc (NYSE:BBY) needs to modify its sales strategies and should focus on sale of iPhone which will be launched next month. Similarly, sale of ultra-high-definition 4K televisions could help best buy to recover. However, it is important to realize that these are just two items and the impact from their sales would be limited.

Best Buy Co Inc (NYSE:BBY) has also planned to improve its shipping and delivery services. The company has allotted a $40 million budget for this cause.

Although online sales have increased, there has been an overall decline in the sales of common electronic items such as TVs and desktop computers. These items alone make 65 percent of the revenue of Best Buy Co Inc (NYSE:BBY) and hence, a decline in their demand had to affect the revenue of the company.

The revenue of Best Buy Co Inc (NYSE:BBY) has decreased to $8.89 billion in the second quarter, reflecting a decline of 4 percent. However, the company was able to report a better than expected profit by resorting to other measures such as laying off workers, shutting down stores and removing additional layers of management.