Dive Brief:

• Best Buy shares tumbled 9% early Wednesday after it reported a same-store sales miss in the fourth quarter and a weak outlook for the current one. Q4 same-store sales dropped 0.7%, worse than the Consensus Metrix estimate cited by Reuters for a 0.5% decline, and the company said same-store sales would fall 1% to 2% in the first quarter.

• Best Buy's Q4 net revenue decreased 1% to $13.48 billion, missing the average Thomson Reuters I/B/E/S estimate of $13.62 billion, but cost-cutting measures boosted Q4 net income to $607 million, or $1.91 per share, from $479 million, or $1.40 per share in the year-ago period. Q4 non-GAAP diluted earnings increased 27% to $1.95 per share from $1.53 a year ago and above the average forecast for $1.67.

• For fiscal 2018, a 53-week year, the company expects revenue growth of approximately 1.5% and an operating income growth rate in the low single digits. On a 52-week basis, Best Buy expects flat revenue and operating income, CFO Corie Barry said.

Dive Insight:

Best Buy unsettled Wall Street Wednesday morning, buffeted by increased electronics sales at Amazon and depressed demand for gaming, tablets, health & wearables and mobile phones. Increased sales in connected home, computing, headphones and home theater were not enough to offset those declines, according to a press release.

In his statement Wednesday, CEO Hubert Joly focused on the company’s higher-than-expected earnings growth, touting the retailer's ability to restrain price promotions and continue its cost-cutting measures. “[O]ur revenue was hindered by unprecedented product availability constraints across multiple vendors and categories, only some of which were anticipated,” he said. “Additionally, there was considerably weaker-than-expected demand in the gaming category.”

Best Buy may be reaching its limit when it comes to in-store and omnichannel improvements that combat Amazon’s rise in the electronics category. Amazon accounted for a whopping 90% of the $5.6 billion growth in consumer electronics sales posted nationwide in 2015, according to a note from Deutsche Bank analysts last year. Five years ago, Amazon had 6.2% share and ranked No. 4 on the list of top 100 U.S. electronics retailers; today, it's No. 2 with 17% share, jumping ahead of Wal-Mart, according to Barron’s. Consumer electronics sales grew 28% at Amazon in 2015, compared to same-store sales increases of 4.3% at Apple and 3.8% at Best Buy in the period. 

Amazon continued that streak at the holidays, extending its market share for devices like the Echo, notes GlobalData Retail managing director Neil Saunders. "As much as wider market dynamics dealt Best Buy a challenging hand, we also believe that Amazon contributed to the company’s weak numbers," he said in a note emailed to Retail Dive. "Over the pre-Christmas period the online behemoth pushed its own line-up of devices hard and frequently used deep discounts to entice consumers."

Still, the retailer has successfully met the challenge so far, according to Matt Sargent, Senior Vice President of Retail at Frank N. Magid Associates, Inc. “Best Buy … has adjusted well to the ‘new normal’ of aggressive competitive forces from Amazon,” he said in an email to Retail Dive. “Best Buy pulled back on store openings, realizing that it had to first be able to compete digitally, so that it didn't lose ground with Amazon, (or at least held the loses to a minimum) and worked on revamping the stores it kept open."

Moody’s Investors Service predicts the brick-and-mortar “leader” in the electronics space will remain disciplined when it comes to margin preservation. “Best Buy’s ability to expand margins in Q4 in the face of what we characterized as one of the most promotional holiday seasons we have seen in the last 15 years, especially in Best Buy’s key product categories, is impressive, and indicates that the company maintained significant discipline over its pricing, avoiding the trap of chasing sales,” Moody’s Lead Retail Analyst Charlie O’Shea said in a note emailed to Retail Dive. “Online sales growth of almost 18%, on an already meaningful base, is impactful, especially as it results in an online percentage of overall sales rate of almost 19%."

Selling the iPhone at a premium could actually be hurting Best Buy, however, considering how Apple positions its stores as destinations, Saunders said. "Such a move may yield some extra profit in a market where supply is restricted, but it also alienates and annoys customers which ultimately damages the Best Buy brand," he said, adding that Best Buy's omnichannel operations are helping insulate it against pressures in the space.

"Without this, and without the extensive investments made to the platform over the past couple of years, the outcome sales would have been significantly worse," he said, adding that the retailer is also doing well in appliances. While Best buy remains a stable retailer, Saunders said that, with pressures unabated, "it will be treading water for the foreseeable future."