Best Buy “the stock” has been on an absolute tear. Best Buy “the retailer” is still a work in progress.
On Tuesday, the consumer electronics retail giant said second-quarter profits far exceeded what Wall Street expected. As a result, Best Buy stock soared more than 13 percent, or $4.07, to close at $34.80, a 52-week high. Since December, shares have more than tripled.
But much of Best Buy’s recent profit came from cost-cutting, not increased sales. For the quarter, sales at stores open for at least a year, a key measure of a retailer’s health, actually fell slightly, and those numbers could have been even worse had Best Buy not recently agreed to match prices of competitors like Wal-Mart and Amazon.
None of this is lost on CEO Hubert Joly, who took over the struggling retail giant a year ago. In an interview with the Star Tribune, Joly said it would take time for Best Buy to meaningfully grow sales as more consumers migrate toward discounters and Internet stores.
Improving Best Buy’s online and store sales is a process that will be “very gradual,” Joly said. “This is the year of transition. This is not a 90-day turnaround. Like I said before, this is a journey. We’re at the bottom of the second inning.”
With 1,000 stores in the United States and locations in China and Canada, Best Buy is the world’s largest consumer electronics retailer with most of its $50 billion annual sales originating from physical retailing.
Some analysts warn that Best Buy needs to start showing significant sales improvements now.
“Expectations are sky-high,” said Brian Yarbrough, a retail analyst with Edward Jones Investments in St. Louis. “They’ve got to start delivering some better results, and we haven’t seen it yet.”
But so far, Wall Street likes what it sees. Analysts say Joly has brought credibility back to Best Buy through his “Renew Blue” plan, which first calls for the retailer to cut costs and protect market share.
By that measure, Best Buy has done well; the company already has erased nearly $400 million in annualized costs through supply chain tweaks and reducing its corporate headquarters staff in Richfield. And while flat sales may not sound impressive, they represent a significant improvement over last year, when sales were falling fast.
“These guys seem to be gaining market share and stabilizing sales,” said David Strasser, a retail analyst with Janney Capital Management. “It feels like the Blue Shirts [store employees] are having an impact on sales. Something is changing at the company.”
But to really claim victory, Best Buy needs to fire up its once-vaunted sales engine. To that end, Joly has invested significant time and money into improving customer service, redesigning floor space to sell more-profitable merchandise and improving its much-maligned website.
“We are not reinventing the wheel,” Joly said. “These are [successful turnaround] practices adopted by other retailers like Home Depot, Nordstrom and William-Sonoma. The [stock] market is excited because we are doing what we say we will do.”
A core part of Joly’s strategy is to partner with Samsung and Microsoft to carve out separate “store-within-a-store” concepts inside Best Buy’s big boxes. The strategy addresses two challenges: how to make use of Best Buy’s excess floor space while helping to boost sales of vital merchandise like personal computers, mobile devices and accessories.
“People used to say our real estate was a big liability,” Joly said. “Now it has become a big asset.”
Analysts say they expect the investments will start to pay off during the key upcoming holiday season by driving more people into Best Buy stores. Though PC sales remain anemic, Best Buy is enjoying strong growth from appliances and tablets. Even televisions, a key product category that suffered big declines in recent years, are picking up.
With the online business, which only makes up about 10 percent of Best Buy’s annual revenue, Joly said the company already has made “significant changes” to the website, including a new search engine, product buying guides and additional customer reviews.
Best Buy hopes the new features will encourage shoppers to buy, not just browse. Of the 1 billion visits to bestbuy.com in 2010, only 1.3 percent purchased something. Nine percent of the customers wanted to buy products but didn’t because they needed more information or the product was not available.
“Best Buy doesn’t have a traffic problem” with their stores or website, said Peter Keith, a New York-based retail analyst with Piper Jaffray & Co. “It’s fairly robust.”
But converting those visits into sales won’t come easy — or cheap. Matching competitor prices keeps cost-conscious consumers from fleeing to rival retailers, but they also erode Best Buy’s profits. While the company does not offer profit forecasts, Best Buy did suggest that such declines will continue well into the next year.
“Price competitiveness remains in place,” Keith said. “At this point [matching prices] seems to be the right move.”