Best Buy Ends FY 2015 On A High Note. Large Screen Televisions And Mobile Phones Drive Q4 Growth.

Best Buy (NYSE: BBY) announced its fourth quarter results for FY 2015 (ending January 31) on Tuesday, March 3rd. It was yet another positive quarter for the company marked by a busy Thanksgiving season and successful delivery of the company’s holiday plan. The company benefited from its investments in inventory availability, multi-channel execution, as well as more effective and relevant marketing. While these investments provided a boost to the top line (1.3% increase year-over-year), its Renew Blue transformation initiatives helped improve operating margins. Overall, in fiscal 2015, incremental non-GAAP SG&A reductions of approximately $420 million were realized, resulting in a non-GAAP operating margin expansion of 80 basis points. Considering that the company had to rethink its strategies and execute them under intense competitive pressure, these are rather impressive numbers from the company. (More importantly, they are working.)

Here’s a quick snapshot of various metrics indicating the company’s performance during the quarter.

• Comparable sales growth of 2% (including the benefit of installment billing) vs a 1.3% decline during the same period last year
• Increase in non-GAAP diluted EPS to $1.48 versus $1.20 during the same period last year
• $1.02 billion in Renew Blue cost reductions (to date) exceeding the company’s $1 billion target
• Ended the fiscal year with $3.9 billion in cash versus $2.6 billion last year

Our price estimate of $33 is at an approximate 20% discount to the current market price. We will update our model of the company as soon as the company releases its FY’15 annual report. Meanwhile, below, we elaborate on the factors that helped Best Buy post a good set of results last quarter.

See our full analysis for Best Buy

Large Screen Televisions and Mobile Phones Drive Comparable Sales

After a decline in comparable store sales (of 1.2%) in in the prio year quarter, in Q4 FY’15 Best Buy reported an increase of 2.8%. CEO Hubert Joly said that product cycles in some categories such as large screen televisions (4K TVs) and mobile phones (new products such as the iPhone 6) helped the company achieve the better-than-expected results. Despite a 3.2% decline in the NPD-reported Consumer Electronics categories (mainly due to weakness in tablet category), domestic segment revenue increased 3.2% to 12.7 billion. On the other hand, comparable online sales increased by about 10% and domestic online penetrations increased from 7% to 9.8% of the revenue. This increase was primarily due to substantially improved inventory availability as the company rolled out ship-from-store across its chain in January 2014. A more targeted online marketing helped drive more traffic to the company’s website and also increased conversion rates.

Renew Blue Initiatives Help in Margin Expansion

During the quarter, domestic gross margin improved to 21.2% versus 20.0% last year. This 120-basis point increase was primarily due to a more structured and analytical approach to the company’s promotional strategy (discussed above). By using its vast database of  information on customer preferences and behavior, Best Buy is investing in the development of  a customer database called Athena that can send tailored marketing messages, instead of mass e-mail campaigns, to customers based on their previous purchases or browsing history. While Best Buy is still in the early stages of being able to personalize marketing messages to individual customers, CEO Hubert Joly said during previous earnings release ((Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, November 20, 2014)) that they’re beginning to see better click-through rates on the new campaigns when compared to mass non-targeted e-mails.

Additionally, ongoing improvements in supply chain efficiencies (Renew Blue initiative) and higher margin recovery on returned, replaced and damaged products also contributed to margin improvements. Since the Q3 FY15 earnings release, Renew Blue annualized cost reductions have increased an additional $55 million, bringing the total Renew Blue annualized cost reductions to $1.02 billion ($710 million in SG&A expenses and $310 million in cost of goods sold). While these savings would have boosted margins significantly, they were partially offset by investments in price competitiveness.

How Is FY 2016 Expected To Pan Out?

The company expects industry and economic pressures that were seen in FY 2015 to continue into the next fiscal year. As a result of weak industry demand in certain product categories and price pressures from competitors such as Amazon, average spending prices in key product categories are expected to rapidly decline. Moreover, service expectations are at a new level in the industry as newer options such as “in-store pick up” are introduced by competitors (where one can shop online and drive to a nearby store to collect the product in person). This makes investments in delivery and cost control imperative for the company, for which Best Buy is going to launch phase two of its Renew Blue cost reduction and gross profit optimization program.

The bottom line is that lower prices and higher costs will put more pressure on the company’s bottom line. While Best Buy has been able to adapt to similar market conditions over the past year, it remains to be seen whether it can carry the same momentum into FY 2016.