Best Buy enters holidays with urgency and purpose

Best Buy on Tuesday continued its string of negative same store stores sales, posting a 4% decline at U.S. stores, and recorded a worse than expected profit.

The company said it had a loss from continuing operations of $13 million, or four cents a share, for the quarter ended November 3, compared to a profit of $173 million, or 47 cents a share the prior year. On an adjusted basis to exclude previously announced restructuring charges, earnings from continuing operations totaled $10 million, or three cents a share, below the 12 cents a share analysts forecast. The deteriorating performance prompted a revision to year-end free cash flow estimate which is now expected to range from $850 million to slightly more than $1 billion, down from a range of $1.25 billion to $1.5 billion provided three months earlier.

"In line with trends experienced over the last three years, Best Buy’s third quarter financial performance was clearly unsatisfactory," said Hubert Joly, Best Buy’s president and CEO. "On November 13, we shared our candid assessment of Best Buy’s situation and unveiled Renew Blue, a set of priorities to begin re-invigorating the company’s performance and rejuvenating Best Buy. The results we are reporting today only strengthen our sense of urgency and purpose."

Best Buy is looking to execute a turnaround at the worst possible time and amid circumstances that are more challenging than those faced by J.C. Penney president and CEO Ron Johnson. Joly joined Best Buy in early September and his selection was roundly questioned at the time due to a limited retail background. In addition, he has sought to develop a strategy to stabilize the company and restore growth under the ever present shadow of former chairman and company founder Richard Schulze who is said to be engineering a buyout of the company. Compounding the situation is the fact that most of the initiatives developed by Joly and his senior leadership team won’t bear fruit until 2013, if then, because the company’s merchandise offering for the holidays was set well in advance of his arrival. Best Buy can only hope that its loyal customers and those seeking electronics items will respond to last minutes tweaks to marketing plans.

If there was a bright spot that can be built upon during the holidays it was that Bestbuy.com sales increased more than 10% to $431 million. The company said it experienced positive comps in mobile phones, appliances and tablets/eReaders, that were offset by declines in notebooks, gaming, digital imaging and televisions.

Online is a high priority for Joly and one of the five pillars of the company’s Renew Blue strategy share with investors just seven days prior to the release of third quarter results. He has previously acknowledged the company was slow to respond to channel and category shifts that have left it at a disadvantage in the online world. Best Buy still leads when it comes to market share at physical stores, but it lags Amazon.com online.

Overall, Best Buy has a 15% share of a market the company values at $228 billion, a nose ahead of Walmart at 15% and Amazon at 4%. However, the past few years have seen Best Buy come back to the field as its markets share has slipped from 17% just two years ago. However, Best Buy said it has a 7% share on online sales versus Amazon’s 21%.

To rectify the situation, Best Buy outlined a "renew blue" strategy at an investor meeting in New York last week that focuses on five priorities; reinvigorate and rejuvenate the customer experience, attract, grow, engage and inspire leaders and employees, work with suppliers to innovate and drive value, increase returns on invested capital and continue Best Buy’s leadership role to positively impact the world.

Those strategies will all take time to implement. In the meantime, Best Buy has to hope its loyal customers remain that way this season and market share losses to competitors such as Walmart, Amazon and Target are kept to a minimum. If Best Buy can stabilize its business in the short run, Joly’s strategy calls for the company to eventually produce operating margins in the range of 5% to 6% and a return on invested capital of as much as 15%.