Electronics retailing giant Best Buy (
BBY
) announced its Q4 and annual results on March 1. The company
reported Q4 revenues of $16.71 billion, marginally higher than
$16.67 billion in the comparable period last year. It managed to
bring down the net quarterly loss to $409 million from $1.81
billion in the fourth quarter of 2011. Best Buy's results were
stable in the fourth quarter due to 11% growth in online sales
driven primarily by the price matching strategy in the holiday
season.
The company's quarterly domestic segment revenues stood at
$12.55 billion, a decline of 0.3% from 2011. This was primarily due
to a loss of revenues from 49 big box stores closed down in 2012,
partially offset by a 0.9% increase in comparable store sales and
additional revenues from 126 new Best Buy Mobile stand-alone
stores. Overall comparable store sales, however, declined by 0.8%
due to a 6.6% drop in the metric in the international segment.
Apart from comparable store sales, the other closely watched
metric in the industry is gross profit margin. This number acquired
additional salience this quarter in view of Best Buy's price
matching policy in the holiday season. Gross profit margin for the
quarter stood at 22.6%, down from 23.1% recorded last year.
After months of build-up and heightened anticipation, the big
dampener was the lack of a buyout offer from founder and ousted CEO
Richard Schulze. The company received a minority investment offer
from three private equity players, but decided not to accept it as
it judged the cost of investment to be excessive for shareholders
and also dilutive in nature. Best Buy's management will now focus
on initiatives to turn around the company, paying special attention
to comparable store sales and profitability.
See our full analysis for Best Buy
Renew Blue To Turn Around The Company
In order to achieve its objectives for the next year, Best Buy
has outlined certain key initiatives under the "Renew Blue"
program.
The big focus will be on accelerating growth in the online
segment. The company intends to increase online traffic and
increase the conversion rate among visitors by providing a more
interactive shopping experience. That would mean keeping track of
user preferences based on their browsing history and generating
recommendations accordingly. The search experience will be further
enhanced by revamping the platform and browsing would be made
easier by creating product pages that provide a consistent and
smoothly navigable experience across devices. This is expected to
be done in time for the next holiday season.
The second initiative is aimed at enhancing customer experience
across channels, be it in-store or online. In addition to improving
the functional experience online, Best Buy has introduced a new
metric called the Net Promoter Score (NPS) to track customer
satisfaction levels with the company's service. This will be
measured for all customers whether they choose to buy from the
company or not. We are of the view that this measurement is a very
handy tool to influence and shape behavior. Indeed, the company has
found that since introducing the NPS in November as customer
satisfaction with its sales associates, service and price
perception has improved. Quantitatively, the NPS has shown a 200
basis point growth.
In order to improve gross profit per square foot, Best Buy will
focus on stocking more items that generate higher margins.
Simultaneously, it will seek to reduce costs through intelligent
inventory management and supply chain optimization.
Further cost reductions are planned through real estate
optimization and by pruning of SG&A expenses. Around 5-10 big
box stores are expected to be closed this year in addition to 49
stores shut down last year. The company hopes to cut down SG&A
expenses by $400 million next year by discontinuing non-core
activities and eliminating redundant management layers. Savings of
around $150 million were achieved over the last several weeks by
laying off approximately 400 people at the corporate
headquarters.
The Year Ahead
The capital expenditure estimate for next year has been pegged
at $700-800 million and incremental SG&A expenditure at
$150-200 million. SG&A expenses for 2012 stood at around $4.2
billion. The bulk of capital spending will be targeted towards
improving online, mobile and multichannel customer experience in
addition to non-recurring costs associated with developing in-house
IT capabilities.
Best Buy declined to provide any earnings or revenue guidance
for next year. However, it conceded that the first quarter will be
weaker than the previous fiscal year due to two reasons. Firstly,
the pre-Super Bowl sales were accounted for in Q4 2012 rather than
Q1 2013. Secondly, the first quarter last year saw some new product
launches but nothing of the kind is slated this year.
What we will be watching keenly next year is the outcome of the
price matching policy. We think that it is too early to pass a
judgement since consumer behavior is extremely difficult to predict
and Best Buy's competitors may decide to engage in an all-out
pricing war to capture the market. From the company's perspective,
its long-term survival may hinge on the success of this policy.
We
have a price estimate for Best Buy of $16
which will be revised shortly in view of the fourth quarter
earnings results.
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