Best Buy Shows A Loss And Warns Of Further Short Term Pain

Electronics retailing giant Best Buy (NYSE:BBY) announced its Q1 results on May 21. The company reported revenues of $9.4 billion, lower than $10.4 billion recorded in the comparable period last year. However, the figure excludes the result from discontinued operations in Europe. Including this, revenue came in at $10.8 billion. Best Buy reported a net profit of $97 million from continuing operations and a net loss of $81 million after accounting for a loss of $178 million in discontinued operations. ^[1]

The quarterly domestic segment revenues stood at $7.98 billion, a decline of 9.6% from 2012. Excluding the impact of an additional week in the last fiscal year, revenue declined by 2.2%. This was primarily due to a loss of revenue from the closing down of 49 big box stores in 2012 and lower comparable store sales. Overall comparable store sales declined by 1.1% due to an estimated 0.8% impact from the shift of the Super Bowl into last fiscal year’s fourth quarter and an estimated 0.3% impact from Best Buy’s decision to reduce sales in certain non-core businesses.

Apart from comparable store sales, the other closely watched metric in the industry is gross profit margin. This number acquired additional salience this quarter in view of Best Buy’s price matching policy in the holiday season. Gross profit margin for the quarter stood at 23.1%, down from 24.9% recorded last year.

Best Buy’s gave an update on its initiatives under the Renew Blue program – a collection of steps the company has outlined to turn around its sluggish performance.

See our full analysis for Best Buy

Update On The Renew Blue Strategy To Turn Around The Company

Last quarter, Best Buy outlined certain key initiatives under the “Renew Blue” program to turnaround the company.

The big focus is on accelerating growth in the online segment. The company intends to increase online traffic and increase the conversion rate among visitors by providing a more interactive shopping experience. That means keeping track of user preferences based on their browsing history and generating recommendations accordingly. In Q1, these initiatives included the deployment of best-in-class search engine marketing tools and a corresponding increase in investments in paid search. Also, Best Buy expanded its affiliate marketing channels and added an option for dynamic product recommendation to the checkout process.

These initiatives resulted in a 16% increase in domestic comparable online sales during the quarter. In the upcoming quarter, the company’s top priority will be to optimize its natural search or SEO ranking.

Another initiative rolled out in full earnest this quarter is aimed at enhancing customer experience across channels, be it in-store or online. Last quarter, Best Buy unveiled a new metric called the Net Promoter Score (NPS) to track customer satisfaction levels with the company’s service. This is measured for all customers, whether they choose to buy from the company or not. We are of the view that this measurement is a very handy tool to influence and shape behavior. Indeed, Best Buy has realized that as the customer satisfaction levels with its sales associates, service and price perception have improved since it introduced the NPS in November. Quantitatively, the NPS has shown a 300 basis point growth.

In order to improve gross profit per square foot, Best Buy is focusing on stocking more items that generate higher margins. Therefore, it has reduced the stock of CDs and DVDs in its stores and is allocating  more store space to mobile and computing products.

Best Buy and Samsung have also entered into a partnership to set up “Samsung Experience” shops staffed with Samsung employees within 1,400 Best Buy stores by June. A number of these in-house stores have already opened and according to Best Buy CEO Hubert Joly, the feedback has been positive so far. While this has given Best Buy access to a successful vendor and will drive customer footfalls to stores, Samsung has gained access to Best Buy’s vast store network to sell its smartphones and tablets by eating into Apple’s market share. The in-house stores were set up only towards the end of April so the actual impact will be witnessed only in the subsequent quarters. Best Buy follows a February-January calendar year.

Apart from these, two other significant factors that are expected to help the company are its price-matching policy and the collection of sales tax from customers buying from Amazon in many states. Best Buy claimed that it is already witnessing increased sales in states where sales tax from Amazon customers is now being collected. ^[2]

Going Forward

In addition to continuing with the Renew Blue initiative, Best Buy has pledged to reduce its business costs. The company is aiming to reduce the cost of goods sold by $325 million through supply chain efficiency and modification of its return and replacement policy. To date, it has managed to generate savings worth $30 million. Best Buy had also pledged to reduce its SG&A costs by $4oo million in North America this year and is making good progress on this front. In the first quarter, it eliminated $135 million in SG&A costs and announced further reductions worth $150 million in March.

Best Buy declined to provide any earnings or revenue guidance for the next quarter. However, it conceded that the ongoing investment in acquiring customers and the price matching policy contributed to gross profit and EPS declines in the first quarter and will continue into the second quarter.

We have a price estimate for of $20 Best Buy.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Best Buy 8-K, SEC [↩]
2. Best Buy Q1 2013 Earnings Conference Call, Seeking Alpha [↩]