Best Buy’s Net Profit Falls On Restructuring, As Underlying Business Remains Strong

On May 21st, Best Buy (NYSE: BBY) released financial results for the quarter ended May 2, 2015. Its revenue for the quarter stayed relatively flat at $8.6 billion compared to the same period, a year ago. An expansion in gross margin by 90 basis points didn’t reflect in the company’s operating margin, which contracted by 140 basis points, largely due to the restructuring charges from the consolidation of operations in Canada. Below is a quick snapshot of the company’s performance on various other metrics this quarter.

• Domestic comparable sales increased 0.6% vs. a decline of 1.3% in the same period a year ago, i.e., Q1 FY 2015
• Comparable online sales grew only 5.3% vs. 29% in Q1 FY 2015, primarily due to the expected 1,000 basis points of pressure from lapping last year’s gaming console introductions
• At 2.6%, non-GAAP operating margin stayed flat compared to last year

What The Numbers Don’t Reveal

While these numbers paint an ordinary picture of the company’s performance this quarter, what they don’t reveal is the strong underlying trend in the company’s domestic business.

About 65% of Best Buy’s revenue comes from the NPD-reported consumer electronics categories, which includes TVs, desktop and notebook computers, tablets not including Kindle, digital imaging and other categories. While the industry declined 5.3% in the quarter, Best Buy’s revenues from these categories saw only a 0.7% decline. This was driven by strong product cycles in large screen televisions and mobile phones and continued growth in the major appliance category. Despite a seasonal decrease in the overall market size in the NPD categories, the company said that they see a genuine customer interest for larger screen televisions driven by new technologies such as 4K. The better customer experience, which differentiates Best Buy from the rest of its competition, is driving a material market share gain in this category, according to the company.

In-Home Services To Be A Key Focus Area

Services is a big part of Best Buy’s competitive advantages. As Best Buy has evolved into multiple delivery channels (online, in-store and in-home), maintaining a seamless multi-channel experience, across all customer touch points, has become crucial for the company. In fact, customer satisfaction was found to have a significant impact on Best Buy’s revenues, according to a study conducted by the CFI group. Customers who were highly satisfied across multiple touch points were found to spend nearly 50% more over the next 90 days than those who were less satisfied. No wonder, Best Buy decided to invest up to $200 million in Best Buy (Canada) stores and BestBuy.ca to build a leading multi-channel customer experience.

Also, customer needs vary by product category. For a computer customer, in-store setup process and education from staff on how to use the product tend to be more influential. On the other hand, quality and timeliness of delivery and installation matter more for television and appliance customers.

Appliance Delivery and Installation Presents An Opportunity For Differentiation

Appliances are becoming an increasingly important segment for Best Buy. Comparable sales in the appliances category grew 12.3% this quarter compared to 7.6% growth in the consumer electronics category. As mentioned earlier, touch points outside a store i.e. delivery and installation are of key importance for appliances.

Even when the in-store experience of a customer is excellent, a negative perception of the very next touch point can result in nearly a 60% drop in customer satisfaction level, according to the CFI group study. Best Buy already has some services in place to address these needs. For example, in the home entertainment category, Best Buy-owned Magnolia Design Centers offer in-home consultations and services, where a professional would visit the customer’s home, understand their needs, and come up with a range of solutions.

However, the company sees further potential for differentiation in this area and plans to leverage its own system designers and Geek Squad agents to improve in-home services.

 

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