Microsoft Retail Stores Shuttering In $450M Hit

‘This is a tough, but smart strategic decision for (CEO Satya) Nadella and company to make at this point,' Wedbush Securities analyst Daniel Ives says. 'The physical stores generated negligible retail revenue for Microsoft and, ultimately, everything was moving more and more towards the digital channels over the last few years.’

Microsoft is closing all 83 of its brick-and-mortar stores under a “strategic change” to its retail operations, a move that will result in a pre-tax charge of approximately $450 million.

The decision comes almost 11 years after the Redmond, Wash.-based technology giant opened its first retail store in Scottsdale, Ariz., in 2009 -- on the same day that it launched Windows 7 -- to better compete against Apple and its popular retail stores.

The bulk of Microsoft’s retail store locations are in the United States, with nine in Canada, the U.K. and Australia.

Microsoft said it would “reimagine” its Microsoft Experience Centers on its Redmond, Wash., headquarters campus and in New York City, London and Sydney, Australia, to serve all customers -- including consumers and small business, education and enterprise customers -- and allow them to experience Microsoft products and services.

“We will continue to co-locate engineering, sales, support, envisioning centers, executive briefing centers and retail spaces for maximum impact for our customers and our company,” Microsoft Store corporate vice president David Porter said in a statement.

Microsoft said it would continue to invest in its online Microsoft.com “storefronts” and its stores in Xbox and Windows. New services include one-to-one video chat support, online tutorial videos and virtual workshops, the company said.

Microsoft’s hardware and software sales have continued to shift online as its product portfolio has evolved to digital products including Microsoft 365, gaming and entertainment, according to Porter.

“We have seen strong growth on Microsoft.com and our digital Xbox and Windows storefronts, reaching up to 1.2 billion monthly customers in 190 markets,” he said. “We will make our digital storefronts the best place to learn, buy and receive support across software and hardware.”

The store closures are a “tough, but smart” strategic decision by Microsoft under CEO Satya Nadella, according to Wedbush Securities analyst Daniel Ives.

“The physical stores generated negligible retail revenue for Microsoft and, ultimately, everything was moving more and more towards the digital channels over the last few years,” Ives said in a report today. “The Microsoft stores were essentially ‘showcase stores’ and was a smart strategy at the time, as more consumers can demo software, Xbox/gaming and play around with new hardware components. That said, in this COVID-19 environment, this was the right time for Redmond to rip the band-aid off and close the stores strategically speaking, with a one-time charge being primarily overlooked by (Wall Street).”

Microsoft stock was trading at $197.27 per share Friday afternoon, down $3.07 or 1.53 percent.

Microsoft’s store locations have been closed since late March due to the coronavirus (COVID-19) pandemic. Since then, Microsoft said its retail team has been helping small businesses and education customers, virtually training enterprise and education customers on remote work and learning software, and helping with customer support calls.

Microsoft distributes its retail packaged products primarily through independent, non-exclusive distributors, authorized replicators, resellers and retail outlets, and it distributes its devices through third-party retailers. It has a field sales and support network that solicits orders from distributors and resellers, and provides product training and sales support.

Individual consumers primarily buy Microsoft products through is retail outlets, according to the company’s latest annual report filed in October with the U.S. Securities and Exchange Commission. Licensing solution partners (LSPs), meanwhile, primarily sell to large organizations, distributors resell primarily to value-added resellers (VARs), and VARs typically reach small and medium organizations. Enterprise agreement software advisors are also typically authorized as LSPs and operate as resellers for Microsoft’s other volume licensing programs. Microsoft’s Cloud Solution Provider program is its main partner program for reselling cloud services.

Microsoft said its retail employees will continue to serve consumers, small-business, education and enterprise customers from the company’s corporate facilities and remotely provide sales, training and support, “while building a pipeline of talent with transferable skills.”

"We deliberately built teams with unique backgrounds and skills that could serve customers from anywhere,” Porter said. “The evolution of our workforce ensured we could continue to serve customers of all sizes when they needed us most, working remotely these last months.”

Microsoft’s approximate pre-tax charge of $450 million or 5 cents per share -- which primarily includes asset write-offs and impairments -- will be recorded in the current quarter that ends June 30.