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

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.

A related development is the push for online retailers to collect sales tax. The U.S. Senate recently passed a bill which would allows states to require retailers to collect sales tax if the shopper is from that state. Amazon has avoided collected sales tax for many years, and only recently began collecting in some states. This brings Best Buy’s prices more in line with Amazon’s and removes the built-in advantage that the online retailer once had. Joly noted in the earnings call:

And in states that are already collecting, we’re seeing an incremental benefit in our online and retail store sales.

So it seems that Best Buy is already benefiting from the sales tax, and that benefit should grow if the Senate bill is ultimately signed into law. It’s unclear how much of Amazon’s growth was attributed to lack of sales tax. I’m sure that at least some people shop on Amazon specifically to avoid paying sales tax, so it will be interesting to see the effect on Amazon’s sales.

Another step that Best Buy is taking is the buy online, ship from store initiative. This allows a customer to buy a product that may be out of stock at the online distribution center but is in stock at a nearby store and have that store ship it directly. This should have the effect of raising the online conversion rate as well as making inventory management more efficient.

Square-foot optimization

For a long time Best Buy has dedicated a huge amount of floor space to CDs and DVDs, which are low margin products. The company is reducing the space allocated to these types of products and replacing them with higher-margin products like appliances and mobile devices. One specific initiative is the Samsung Experience Shops, which are a store-within-a-store concept where Samsung representatives tout the benefits of the company’s devices. So far these shops have been installed in 525 large-format stores and 390 mobile stores, an impressive build up in such a short amount of time. More shops are expected to be installed in the second quarter, and these should lead to better profitability starting next quarter

Another step Best Buy is taking is adding dedicated clearance sections in stores and allowing online shoppers to buy these items directly from the website. This could also provide a boost to online sales.

Part II: A deeper look

In Part II of this article I’ll look at the last three items of Renew Blue, all of which relate to cutting costs, and take a deeper look into exactly how profitable Best Buy was in the quarter. Even though GAAP EPS was negative due to write-offs relating to Europe the company actually generated quite a bit of profit.

Best Buy earnings call transcript

The article The Turnaround Continues: Part I originally appeared on Fool.com and is written by Timothy Green.

Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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