The Plan That Could Keep This Retailer's Stock Rising

Ben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Best Buy (NYSE: BBY) has had surprisingly impressive performance in the markets during 2013. Since the beginning of the year, the stock has risen 147% thanks to new CEO Hubert Joly. The stock continues to rise despite a 2.6% decline in revenue to $9.38 billion in the last quarter . Even though company performance hasn’t yet accelerated under Joly, the CEO has implemented a detailed plan for the future growth.

Renew Blue

Best Buy’s most recent quarter saw comparable-store sales decline 1.1% as a result of an early Super Bowl, which shifted TV sales to the last quarter of 2013, and an intentional reduction of sales in non-core areas.  The company is now focusing on improving these comparable-store sales and profitability through several priorities of the “Renew Blue” initiative.

First, Best Buy is focusing on accelerating online growth. In the most recent quarter, the company invested in search engine and affiliate marketing and added product recommendation to the checkout process. These actions helped domestic comparable online sales increase 16% during the quarter. Moving forward, the company is going to make functional upgrades to its website that include a new search engine.

The company is also working on SEO optimization, which is a fancy way of saying  it’s trying to move its website towards the top of Google and other online searches. Historically, Best Buy has undervalued its website’s potential and these investments should help improve overall earnings.

Second, the company is improving the multichannel customer experience which is the experience that a customer has across all aspects of the company.  The store, website, and coupon mailings are all part of the multichannel customer experience. . The company is achieving this improvement through efforts such as a “low price guarantee” and the “buy online, ship from store” initiative. Both efforts will increase customer convenience.

Third, the company will work to increase revenue and gross profit per square foot of store space, reducing space given to low-margin products like CDs and replacing it with high-margin products like mobile devices.

Fourth, Best Buy will try to drive down its cost of goods sold by improving supply chain efficiency. It hopes to do this by optimizing how it replaces store inventory, expanding its online delivery capability, and improving the process that handles returns and product damages which costs the company roughly $400 million a year. 

Another part of the Renew Blue initiative is an agreement with Microsoft (NASDAQ: MSFT) to create a store-within-a-store  . These mini Windows Stores will be in 600 Best Buy locations and will feature Microsoft computers, phones, and Xbox systems and accessories. These new stores should help Microsoft turn around its computer sales slump. The stores will also help differentiate Best Buy from its online competitors.

If Best Buy can effectively implement its Renew Blue initiatives, then the company could see earnings increase through efficiency and improved online sales.

The Amazon threat

One of Best Buy’s biggest competitors is the online retailer Amazon.com (NASDAQ: AMZN). Amazon offers the same products as Best Buy and consumers have been using the brick and mortar stores as show rooms for cheaper online shopping.  These customers take advantage of store amenities such as the work force and physical products but refuse to pay  the higher prices. 

Best Buy is dealing with this problem through their “low price guarantee” that would eliminate Amazon’s price advantage.  These lower prices will hurt Best Buy's margins, but are necessary in order to improve store sales.  

Best Buy also has the Geek Squad, which offers tech support to customers.  This convenient tech support helps separate Best Buy from Amazon's support, which is limited to the phone or internet, and is not as hands-on as Geek Squad.  With in-store "Precincts," the Geek Squad acts as an additional draw for customers. 

Best Buy isn't a perfect parallel competitor of Amazon, which is a much larger company that offers different products.  Best Buy won't "beat" Amazon, but with Best Buy’s improving online capabilities and price management, the company has developed a solid strategy to deal with Amazon and other online competitors.  

Conclusion

Under the leadership of Hubert Joly, Best Buy has taken steps to increase efficiency, improve its online sales, and create a competitive advantage. The Renew Blue initiative looks like a good plan and if effectively implemented could lead to increased earnings for Best Buy and continued share growth in the future. But with the massive run Best Buy's stock has had this year and the decline in revenue last quarter, I'd wait for a pullback, then call it a buy.   


Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus