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Best Buy Co., Inc. (BBY) – The Turnaround Continues: Part I

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Best Buy Co., Inc. (NYSE:BBY), the electronics retailer which everyone loves to hate, has been working to cut costs and become more competitive since CEO Hubert Joly was hired to turn the retailer around last year. Results from the fourth quarter of last year, which ended in January, showed the first signs of improvements as Joly’s strategy began to take hold. And now, after the company released its first quarter earnings, it’s clear that the company is on the right track.

A little confusing

Best Buy Co., Inc.The numbers from the first quaretr are a bit muddled for a few reasons. First, the Super Bowl was shifted into the fourth quarter, taking with it sales of TVs and home entertainment products. Second, the company decided to reduce sales in certain non-core business, further reducing total revenue for the quarter. And third, a number of big box stores have been closed over the past year in the US and Canada.

Total revenue came in a $9.38 billion, down 9.6% from the same period last year. Domestic comparable store sales dropped by 1.1% while comparable online sales jumped 16.3% year-over-year. Non-GAAP EPS dropped to $0.32 from $0.76 in the same period last year. Joly had this to say:

As expected, first quarter Domestic comparable store sales were down 1.1%. This was the result of the Super Bowl shifting into last year’s fourth quarter as well as our decision to reduce sales in certain non-core businesses. Excluding these impacts, Domestic comparable store sales were flat for the quarter despite no new major product launches and late deliveries in the smart phone category, and we delivered a better-than-expected non-GAAP diluted EPS of $0.32.

So excluding the special circumstances comparable store sales were flat. This is an impressive result given the expectations. The jump in online sales is also impressive, as the rate of growth in this channel has increased from the same period last year. The company is finally focusing on ecommerce, something that they should have done years ago.

The EPS for the quarter beat analyst expectations while revenue fell well short, likely because analyst estimates didn’t account for the Super Bowl and the loss of European revenue from the sale of Best Buy Co., Inc. (NYSE:BBY)’s European operations. This makes the drop in the stock price following the report seem short sighted.

Renew Blue

Joly’s turnaround initiative is dubbed “Renew Blue” and has six priorities for the company outlined in the earnings call:

1). Accelerate online growth
2). Escalate the multi-channel customer experience
3). Increase revenue and gross profit per square foot
4). Drive down cost of goods sold
5). Gradually optimize the U.S. real estate portfolio
6). Reduce SG&A costs

Accelerate online growth

The 16% increase in online sales shows that this initiative is working so far. The company plans to further optimize its website, bringing it into the modern ecommerce era by adding dynamic product recommendations and focusing on the mobile experience. Best Buy Co., Inc. (NYSE:BBY) missed the ecommerce boat and has been behind competitors like Amazon.com, Inc. (NASDAQ:AMZN) for many years, but now the company is dedicated to making up lost ground.

Customer experience

A common complaint about Best Buy Co., Inc. (NYSE:BBY) in the past was the lackluster customer service, but the company is taking steps to improve the experience. Last year the company introduced a metric to track customer satisfaction and based corporate incentive plans at all levels on the results. This should encourage management to focus on the customer experience instead of just making sales.

In the fourth quarter of last year Best Buy Co., Inc. (NYSE:BBY) implemented a price matching strategy which the company later made permanent. In addition to this the company lowered prices in general during the quarter to be more competitive against the likes of Amazon.com, Inc. (NASDAQ:AMZN). This led to a decline in the gross margin of 1.9 percentage points year-over-year, but it is likely a necessary step.

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