Best Buy looks to thrive in e-commerce era
Wasn’t Best Buy supposed to be out of business by now? Instead, the company has shown itself to be one of the retail industry’s most resilient operators, achieving growth in the face of intense competition and deteriorating demand for once hot product categories like tablets.
Not that long ago Best Buy was at risk of becoming irrelevant, a victim of showrooming and competitive forces, headed for a fate similar to RadioShack. Instead, as evidenced by its fourth quarter results, Best Buy is practically thriving against some still challenging circumstances.
Total company sales in the fourth quarter ended Jan. 31, increased 1.3% to $14.2 billion and profits on an adjusted basis to exclude several non-recurring items, increased to $526 million, or $1.48 a share, compared to $424 million, or $1.20 a share. The company fared even better with its domestic segment which accounts for 89% of revenue. Domestic sales increased 3.2% to $12.7 billion and same store sales increased 2%. Domestic online revenue increased 9.7% to $1.7 billion the company said because of substantially improved inventory availability made possible by its chain-wide rollout of ship-from-store capability in January 2014.
“A compelling merchandise assortment and strong multi-channel execution drove these better-than-expected results as we capitalized on the product cycles in large screen televisions and mobile phones,” said Best Buy president and CEO Hubert Joly. “These two categories were the primary drivers of our year-over-year revenue growth, and more than offset weakness in the tablet category which was impacted by material industry declines.”
Best Buy’s rate of sale growth may not seem tremendous, but they are impressive considering the categories of merchandise it offers put it in direct competition with the likes of Amazon.com, Walmart, Costco and Home Depot and Lowes. In addition, product categories such as flat screen televisions remain prone to deflation while others are characterized by boom and bust cycles.
That proved to be the case with tablets during the fourth quarter when the company said a material decline in sales offset growth in televisions, mobile phones and computing. Service revenues also declined.
Despite ongoing challenges, Best Buy has come a long way since the fall of 2012 when Joly identified declining same store sales and operating income as the company’s two most pressing challenges. Overall last year, Joly noted that Best Buy stabilized comparable sales and delivered incremental expense reductions of approximately $420 million that allowed adjusted operating margins to expand 80 basis points. The company ended the year with cash and equivalents of $3.9 billion compared to $2.6 billion the prior year. In light of its improved situation, Best Buy announced a special one time dividend of 51 cents, increased its regular dividend 21% to 23 cents a share and resumed share repurchase activity with a commitment to buy back $1 billion worth of stock in the next three years.
“As we look forward to fiscal 2016 and beyond, it is imperative that we continue to focus on driving comparable sales and improving our operating income rate while funding investments in our future,” Joly said. “As we’ve previously shared, we are pursuing a strategy that is focused on delivering advice, service and convenience at competitive prices to our customers. Within this strategy, we are focused on driving a number of growth initiatives around key product categories, life events and services. To drive these initiatives, we are pursuing and investing in the transformation of key functions and processes.”
The investments the company plans to make will pressure profitability in 2015 while demand challenges hamper sales. For example, the company expects same store sales during the first half of the year to be flat or down slightly due to declines in the tablet category and limited visibility into major new product launches. The company also expects its operating margin to contract between 30 and 50 basis points.