Best Buy’s Earnings Preview: Key Initiatives That Will Drive Growth

Best Buy (NYSE:BBY), the largest specialty retailer of consumer electronics in the U.S., will report its Q1 2015 earnings on May 22. After witnessing a significant decline in its top line in fiscal 2013, the company saw its growth re-accelerate in fiscal 2014 as it benefited from its restructuring initiative. Best Buy reported a 6.5% growth in its revenue in fiscal 2014, and its net income increased to $687 million (compared to a net loss of $469 million in fiscal 2013). However, the company’s stock price has declined by over 50% year-to-date. (Read Our Article: Factors That Led To A 40% Decline In Best Buy’s Stock Price In 2014)

We feel that the recent decline in stock price brings about a correction in Best Buy’s valuation. Our price estimate of $26.38 for the company is now in line with the current market price. Best Buy remains confident that its turnaround strategy will re-accelerate its growth in the future. It claims to have made significant progress against several Renew Blue priorities (its restructuring program), which it believes leaves it well-positioned to enter fiscal 2015.

See our full analysis for Best Buy

At the start of 2013, 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 in fiscal 2015 as well.

1. Increasing Focus 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 (NASDAQ:AMZN) and other competitors. In Q4 2014, Best Buy’s Buy’s online sales grew more than 25% and the company derived 12.7% of its domestic revenue from online sales, compared to 10% last year. The company intends to increase online traffic and the conversion rate among visitors by providing a more interactive shopping experience.

Last year, Best Buy initiated a pilot ship-from-store approach (in 50 stores) which enables all its distribution centers, and not just the ones previously allocated to e-commerce, to handle online orders. The company claims that 2% to 4% of its online traffic does not result in a purchase because it does not have the inventory in its distribution centers, but around 80% of the time the stock is available in one or more of its retail centers. ^[1] Best Buy has now rolled out ship-from-store to over 1,400 stores.

In the next 24 months Best Buy aims to further improve its online shopping experience by enhancing search, tools, recommendations, and product and price information to make it easier for customers to find and choose products.

2. 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 through improved analytics over the next several quarters. Though the lower prices enhance Best Buy’s competitiveness in the market, it puts pressure on its bottom line.

3. 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 (OTC: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. At the end of fiscal 2014, it had 1,400 Samsung & 600 Windows store within a store and completed the first phase of its floor space optimization.

4. Lowering Opex and COGS

Best Buy is aiming to reduce its Cost Of Goods Sold through supply chain efficiency and modification of its return and replacement policy. Having exceeded its cost reduction target of $725 million in Q4 2014 (it delivered cost reductions of $765 million in the quarter), Best Buy has increased its Renew Blue cost reduction target to $1 billion. The company claims that, excluding the impact of the increased mobile warranty expense, its cost savings and other operational improvements  have materially offset its price matching policy and other Renew Blue investments.

4. Athena Initiative

Best Buy has been working on a big data project called Athena that will shift its marketing effort to more personalized email messages and offers, which will enable a more targeted approach to customer marketing. This is one of Best Buy’s key growth initiatives for the next two years. Best Buy has one of the biggest house files in retail based on past purchases, browse history, location, and demographics. By launching project Athena, the company aims to better engage its customers for its loyalty program and credit card offering.

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1. Best Buy Enables Online Fulfillment from All DCs, Pilots Ship-from-Store, Retail Info Systems, July 1, 2013 [↩]