Best Buy And Its Battle Against Declining Trends In Tablets And Mobile Phones

Best Buy (NYSE:BBY) recently reported its earnings for Q4, 2016, which were better than the street estimates. The company reported non-GAAP EPS of $1.53 versus $1.48 last year. Overall revenues reported were $13.6 billion. Domestic revenue declined 1.5% due to a 5% decline in the electronics categories, primarily represented by tablets and mobile phones. However, Best Buy delivered a strong performance in the health & wearables, home theater and appliances segments. Best Buy managed to grow its online channel sales with e-commerce revenues increasing nearly 14% to account for 15.6% of total domestic revenue. Best Buy also successfully managed to increase employee engagement scores which led to lower employee turnover. Best Buy realized increased cash flow from its operations by making margin improvements which gave it the ability to return significant amount of cash flows to its shareholders through increased share repurchases. The company  announced a program to return a total of $1.5 billion in cash to shareholders, including $1 billion in share repurchases and the remainder in dividends.

Overall Best Buy’s future corporate strategy can be summed up in two pointers:

• Consolidate its industry leading position and ameliorate its multichannel capabilities in order to serve a greater population of customers
• Continue its focus on productivity improvements and improved margins in order to drive value for its shareholders

See our complete analysis for Best Buy

Challenging Macro-economic Environment Weighs Over Best Buy’s Performance In Canada

The company’s business in Canada suffered as revenue exhibited a strong decline of 26% due to the impact of foreign currency effects and recent store closures. Also contributing were the challenging macroeconomic environment in the region due to the large decrease in oil prices, which has reduced GDP growth in Canada. It should be noted that the country is heavily dependent on oil exports and a decline in oil prices has adversely impacted the overall economic growth.

We expect tough macroeconomic conditions to persist in the near future and accordingly, we estimate Best Buy’s international revenues will decline between 15% and 20% in the next quarter.

Cost Reductions Will Help Improve Margins

Best Buy successfully managed to increase employee engagement scores which subsequently managed to curb employee turnover. Along with that, it also formed long term alliances with key companies in the technology sector in order to facilitate a smooth and predictable line of products. It also introduced a renewed version of Renew Blue Phase 2 program wherein it delivered a cost reduction of $150 million against its overall target of $400 million. Going forward we expect Best Buy to successfully navigate these troubled waters and manage its gross margins even better by realizing the overall cost reductions of its Phase 2 program.

Relentless Focus On Customers

Under the reaffirmed guidance of its new CEO, Best Buy is focusing on forming long-term relationships with its customers with the objective increasing customer awareness of new technologies and products. Also, the company’s new initiative in the form of the development of its Blue Shirts in-store and Geek Squad outbound tech support has generated significant returns in terms of driving custumer access to high-tech products. (The Geek Squad provides 24-hour telephone and emergency on-site support to enhance consumer retention and loyalty.) And the company believes that the same arms it with the capability of serving their customers better and take their overall competitive advantage to the next level

New Initiatives To Aid Sales Growth

Given the declining trend in mobiles and tablets, the company is shifting its focus to its home theatre product offerings, so as to create a superior customer experience by leveraging its market leading share in 4K and large screen televisions

The company has also come up with a store-within-store concept by adding five Magnolia Design Center stores within a store, bringing their total to 84 by the year-end. In the appliances segment, the company sees itself in a formidable position and ideally positioned to grow their market share by rolling out an incremental 27 Pacific Kitchen & Home stores within a store bringing our total to 203 at year-end.

The company is also investing in newer product offerings by including “internet of things” product offerings like security, lighting and video monitoring among its latest product assortments. In order to ensure that the company does not lose out to its competitors in the connected home segment, it is trying to leverage its dominant position in routers and networking equipment in order to expand its in-store presentation.

Enhancing Its Digital Capabilities

The company has exhibited great awareness in embracing the fact that customers are increasingly more inclined to shop online through their phones and tablets.  It is thus repositioning itself in the wake of increased competition from online retailers like Amazon. It has done the same by rolling out features like Blue Assist which allows customers to simply shake their device to get live help with products and orders through chat, call and email. Apart from this, Best Buy has also tied up with Curbside, a mobile shopping app, which lets users shop from their phones and then pick up their purchases at a local retailer without getting out of their cars. The great thing about Curbside and the impact it is having on Best Buy’s digital sales can be illustrated from a survey by TechCrunch which stated that over 55% of those who have shopped on Curbside have made a repeat purchase.

However, in spite of the plethora of measures being rolled out by Best Buy in order to attract both brick and mortar as well as online customers, the market for consumer electronics (in particular tablets and mobile phones) is expected to contract over the near term which has the potential to drag down the company’s revenues. However, Best Buy is aware of the issue and, hence, is diversifying its product assortment and loading it up with new offerings in order to offset the decline in the near term.

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