Why Best Buy’s Stock Price Has Risen By Over 200%

With over 1.6 billion visits to its websites and stores every year, Best Buy (NYSE:BBY) is the largest specialty retailer of consumer electronics in the U.S. and operates stores in Canada, China and Mexico as well. The growing competition from retail giants including Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT) has eroded Best Buy’s top line growth in the last few years. Best Buy witnessed a 14.4% decline in its revenue base in 2012. Though the company has come out with innovative schemes to re-accelerate its business, the move has impacted its gross margins which in turn put pressure on its bottom line.

However, with its restructuring initiative underway, Best Buy has reported encouraging financials in the last three quarters. The company has shut down its under-performing stores and is in the process of revamping existing stores to enhance the customer buying experience. A stabilizing revenue base and improving margins increased the company’s Q2 2014 net income from continuing operations to $237 million compared to $31 million an year ago.

Best Buy’s stock price has risen by more than 200% in the last 10 months. Our price estimate of $26 is at a significant discount to the current market price of about $38. While the strong turnaround strategy and improving financials are encouraging, we remain cautious on the company’s outlook until we see a sustainable improvement in its top line and profitability.

In this article we discuss key initiatives taken by Best Buy which has contributed to the positive sentiment around its stock value.

See our full analysis for Best Buy

Progress Made Through The Renew Blue Program

At the start of this year, Best Buy outlined six key initiatives under the “Renew Blue” program to turn around the company:

1. Accelerating online growth
2. Enhancing the multi-channel customer experience
3. Increasing revenue and gross profit per square foot to enhance store space optimization and merchandising
4. Driving down cost of goods sold for supply chain efficiencies
5. Continuing to gradually optimize the U.S. real estate portfolio
6. Further reducing SG&A costs

Best Buy claims to have made progress in each of these initiatives and intends to continue investing in the same for the rest of the calendar year.

– Focusing on Online Sales: Accelerating growth in its online segment remains one of the main focus for Best Buy as it aims to update its website to get on par with Amazon and other competitors. Best Buy currently derives less than 10% of its store revenues from online sales. It intends to increase online traffic and increase the conversion rate among visitors by providing a more interactive shopping experience. Its initiatives resulted in a 16% and 10% increase in domestic comparable online sales in Q1 2014 and Q2 2014, respectively.

– Price Matching Policy: March 2013, Best Buy put in place a permanent “Low Price Guarantee” policy under which it will price match all local retail competitors and 19 major online competitors in all product categories and on nearly all in-stock products, whenever asked by a customer. The policy is an attempt by Best Buy to tackle the problem of showrooming, the phenomenon of potential customers using brick-and-mortar stores to browse through products only to order them online at cheaper prices. It will focus on making its price more competitive though improved analytics over the next several quarters. Though the lower prices enhances Best Buy’s competitiveness in the market it puts pressure on its bottom line.

– Enhancing Customer Experience in Stores: Best Buy has introduced 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. Best Buy claims that the customer satisfaction levels with its sales associates, service and price perception have improved since it introduced the NPS in November last year.

– Dedicated Selling Space For Microsoft, Apple & Samsung: To enhance store space optimization and merchandising, Best Buy entered into a partnership with Microsoft (NASDAQ:MSFT) to open the latter’s stores within the company’s brick-and-mortar outlets, in June 2013. Microsoft is the third tech giant after Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) to have a dedicated selling space within Best Buy stores. Best Buy claims to have witnessed a good response for these stores so far. However, Best Buy expects the deployment of the Microsoft stores to offset its top line growth in the short term.

– Lower Business Costs: Best Buy has pledged to reduce its business costs and is aiming to reduce its 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 claims to have made good progress so far. In Q1 it eliminated $135 million in SG&A costs and announced further reductions worth $150 million in March.

Best Buy is in the process of rolling out the Renew Blue program in Canada and China as well.

Exiting Europe To Focus On Its U.S. Operations

In 2008, Best Buy entered into a joint venture with Carphone Warehouse, Europe’s biggest independent mobile phone retailer, to tap the growth potential in the region. However, Best Buy announced its decision to sell its 50% stake in the venture in April this year. Marking its exit from the European market, the deal signals that the retailer is more keen to focus on enhancing its competitiveness in the domestic U.S. market. In 2012, Best earned approximately 75% of its sales from the U.S. compared to 10% from the European market.

Best Buy needs a strong balance sheet to meet its expansion targets in the U.S. We think that the cash from the Carphone Warehouse transaction will be used to further expand Best Buy mobile and make investments in altering the product mix at its outlets. Loss of revenues from Europe is expected to lower Best Buy’s earnings by around $2.8 billion this year.

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