Can Best Buy Co Inc (NYSE:BBY) Offset Its Challenges?

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  1. Holiday sales decrease 3.6%.
  2. Smartphone sales disappoint in the holiday season.
  3. $5 billion earmarked for shares repurchases.

Best Buy Co Inc (NYSE:BBY) is in the process of improving vendor partnerships with a store-in-a-store concept and boosting their online business. However, unfavorable currency translation terms and growing competition are some of the headwinds the company is battling.

Holiday sales highlights

Best Buy Co Inc (NYSE:BBY) recently reported its December holiday performance, with the results mostly showing where the company is succeeding and where more effort is required.

Overall, Best Buy’s holiday results underwhelmed. Total sales descended 3.6% YoY. Neither domestic nor international operations impressed during the holiday. Domestically, comp sales contracted 1.2% YoY as ongoing brand consolidation in Canada together with unfavorable currency movements pushed international sales metrics below expectation.

Due to lackluster holiday results, Best Buy now expects F4Q2016 revenue to decline. The retailer initially guided flat growth of 4Q revenue.

What caused the problem? Weak uptake of smartphones during the holiday was partly to blame for Best Buy’s disappointing holiday sales. The comparable-store sales in the division where mobile phones belong were down 6.7% YoY in the holiday month.

What next? It is not just retailers alone worrying about decaying smartphone sales, but smartphone manufacturers are feeling the heat of cooling interest in their products. Due to Smartphone sales becoming an increasingly uncertain market, Best Buy is looking for new product categories such as wearables to offset smartphone weakness. Wearables, appliances and television were the bright spots in Best Buy’s holiday results.

Besides the soft holiday sales, Best Buy still managed to outperform the broader industry. It gained share from a number of smaller rivals, with impressive growth being registered on its online segment. That being said, Online currently contribute less than 20% of Best Buy’s total sales.

From the holiday results, one gets the impression that Best Buy’s various turnaround efforts are paying off despite unfavorable market conditions that are punishing almost every retailer. However, with a currently diminished digital presence, Best Buy needs to move quickly to match the likes of Amazon that are threatening to dilute its competitive advantage with better pricing and faster delivery services.

How can Best Buy offset the challenges in its industry? The one thing to note is that retail industry is rapidly evolving – e-commerce is upending the industry and Best Buy has to catch up. However, it should also not be lost on investors that as much as in increasing number of consumers are buying online, store experience remains important and Best Buy can leverage its physical store footprint to tackle online competitors.

Best Buy’s potential growth drivers

Store within a store strategy

Best Buy Co Inc (NYSE:BBY) has figured out that the store within a store concept is a viable strategy to drive sales and profitability in a changing retailer environment. The store-in-a-store concept allows for the display of many different brands in a convenient manner under the same roof and it has game-changer potential for legacy retailers like Best Buy.

On its part, Best Buy is rapidly expanding stores within its stores. There are already 1,400 Samsung Experience Shops located inside Best Buy stores in various locations. At least 800 Windows Stores have also been opened inside Best-Buy outlets.

The store within a store movement continues at Best Buy. Appliances are becoming an increasingly important part of its sales, Best Buy is also in the process of boosting appliance presence in its stores. As such, the company recently announced the completion of a plan to roll out 176 Pacific Kitchen & Home stores within its facilities by the end of 2015. Best Buy can also been seen taking advantage of the challenges at its rivals Sears to grab more market share and sharpen its play in the appliance segment.

Best Buy also hosts more than 500 modern Apple stores within its stores. In addition, about 380 Sony home theatre stores can also be found inside various Best Buy stores.

Renew Blue turnaround initiative

Best Buy Co Inc (NYSE:BBY)’s Renew Blue is a turnaround program whereby the company is lowering prices to match or retail rivals such as Amazon as part of the efforts to drive sales and reclaim lost customers. Under the program, the company simplified its management structure, mainly doing away with certain roles and saving money in the process. At the end of 2014, Best Buy disclosed that it had saved more than $1 billion through its Renew Blue program.

What the company is currently doing with financial savings coming through Renew Blue is redeploying them in the business to further drive growth. As such, Renew Blue is presently not having direct impact on the bottom-line. But given that the management is keen to drive topline growth, reinvesting the savings in the business is commendable.

Pressure points

Stiff competition

Best Buy faces competition from almost all directions in its industry and competitors come in all shapes and sizes. Amazon.com, Inc. (NASDAQ:AMZN) and Wal-Mart Stores, Inc. (NYSE:WMT) are among its chief tormentors as they get deeper into electronics retail business. Best Buy is under pressure to innovate to survive the competition in its space.

Dismal online presence

Best Buy Co Inc (NYSE:BBY)’s diminished online presence is a serious drawback. The retailer currently draws only a tiny fraction of its total sales from digital channels, which makes it difficult for it to catch up with the likes of Amazon. Moreover, Best Buy’s limited online presence means that it still has to spend more money to build its digital business from the ground upwards.

International weakness

In the near-term, international operation will remain a serious drag on Best Buy’s business. Unfavorable forex movements and ongoing consolidation in markets like Canada currently cloud Best Buy’s international operation. In the last quarter, international sales fell 30% and the trends is expected to continue in the coming quarters.

Other takeaways

3Q results highlight

Best Buy Co Inc (NYSE:BBY) revenue of $8.82 billion in 3Q fell short of the consensus estimate of revenue of more than $8.84 billion. However, EPS of $0.41 in the quarter comfortably beat expectation of $0.35. Current quarter revenue is expected to decline from a year ago, thanks to currency headwind and international brand consolidation.

The chart below shows Best Buy’s quarterly revenue trend:

Capture

Shareholder return

Commitment to shareholder returns remains alive at Best Buy. The company is combining dividends and buybacks to return value to shareholders. There is $5 billion in the current buyback authorization program with at least $1 billion expected to be returned to shareholders in the next three years. Best Buy repurchased $64 million worth of stock in the last quarter.

The company also sweetened its quarterly dividend by 21%, thus pushing quarterly dividend payout to $0.23 per share.

Bottom line

The secret to Best Buy Co Inc (NYSE:BBY)’s success lies in matching the costs of digital rivals and leveraging its physical store experience to boost sales and drive profitability.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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