Can Best Buy Stage a Comeback?
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Today, in the era where e-commerce has been growing rapidly with each passing day and is leaving the retail sector behind, it’s time for the retailers with large showrooms to pull up their socks and change with the dynamics of the market. Retailer Best Buy (NYSE: BBY) is a typical example which recently posted its first quarter earnings, beating the Street estimates. Let us understand what exactly happened.
Performance – Weak or Strong?
Though revenue for the quarter increased 2% to $11.6 billion from last year, profits dropped 26% to $158 million, or 46 cents a share. An extra week in the quarter made revenues surge but what about the drop in profits? Is it the real picture of the earnings? Definitely not.
The fall in profits was due to huge restructuring costs incurred by the company during the period. This is a one-time expense so we need to look beyond it. The adjusted earnings per share stood at 72 cents a share against Wall Street estimates of 59 cents per share.
The restructuring charges were due to the electronics retailer’s turnaround strategy of closing stores, laying off people in order to concentrate more on the new type of stores which are smaller and weigh lighter on the cost structure. The Minnesota based company has already closed 41 stores with the belief that they need to become leaner so as to adapt easily with the market dynamics. The company plans to reduce their costs by $800 million.
The turnaround plan came as a reaction to the fact that the retailer’s stores were serving as showrooms for the online retailers where the visitors bought products online. The biggest competitor in this regard was Amazon (NASDAQ: AMZN), which has been growing its online business at a rapid pace. Amazon is focused on innovation in its business so as to reach more consumers. Its Kindle Fire tablet was a masterstroke and stands second only to the iPad in terms of tablet sales. Moreover, the tablet was designed with the aim of selling Amazon’s content, leaving Best Buy far behind.
Coming back to the results of Best Buy, it witnessed increased revenue from tablets and mobile phones due to the introduction of new iPads and the latest smart phones. This increased comparable sales by 13% but the same was compensated by the decrease in revenues for gaming equipment, computers, and cameras.
The domestic market’s online revenues surged 20% but the international market showed poor results. The tough economic environment in Europe took its toll over the company’s same store sales. Economic slowdown and weak demand for appliances, a major portion of sales, led to a decline of 28% in the comparable sales of the Five Star segment.
The cost reduction plan worked for the company since the implementation of the same pulled down the costs. A key factor that worked here was lower advertising costs.
With the launch of new operating system from Apple and Windows 8 in the year, Best Buy is expected to perform well. Introduction of new mobile phones which will boost sales coupled with the cost reduction initiatives will work for the company in the coming months.
The new strategies implemented seem to work in favor of the company. This highlights the benefits of being a dynamic company which adapts itself to the changing tastes and preferences of customers and the market demands. Although the recent fracas at the company is a major area of concern, I believe Best Buy is doing its bit by becoming flexible and might turn out to be a trump card in future.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services recommend Amazon.com. 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.If you have questions about this post or the Fool’s blog network, click here for information.