Best Buy's turnaround through much of 2013 was dampened by weaker-than-expected results during the holiday period.
Jim Gehrz, Star Tribune
Best Buy sharpens its cost-cutting
- Article by: Jackie Crosby
- Star Tribune
- February 28, 2014 - 5:27 AM
After a challenging holiday season, Best Buy Co. says it is getting even more aggressive on costs.
The Richfield-based retailer said Thursday that it now aims to top $1 billion in savings as it continues a “Renew Blue” turnaround that started a little more than a year ago. The company cut $765 million from its operations last year, outpacing the original multiyear target by $40 million.
“That’s much faster than anybody expected,” CEO Herbert Joly told the Star Tribune. “We’ve also improved the customer experience in material ways, and we’ve laid some very important foundations for the future.”
Joly declined to discuss reports that the company laid off 2,000 store managers this week, but did indicate that future savings would be focused on measures other than reducing its workforce of more than 140,000. The strategy, Joly said, will be to eliminate inefficiencies in structural areas consumers don’t see, such as improving logistics, working with vendors and reducing returns.
“We are focused on what we can control,” he told investors during a conference call.
The consumer electronics giant has been fighting to strengthen its position in an increasingly competitive marketplace by reducing prices to compete with the likes of Amazon and Wal-Mart. Best Buy telegraphed more than a month ago that its results for the holiday season would be weaker than many had hoped. That disclosure led to a 29 percent decline in its stock price during a single day of trading last month.
While reporting financial results on Thursday, Best Buy executives emphasized several positive signs — profit margins were eroding at a much slower pace, and sales had “stabilized.” Joly said cost reductions and operational improvements helped offset a difficult holiday season marked by price wars, frigid weather and a still-skittish consumer.
Analyst Ken Perkins of Retail Metrics Inc. said he was encouraged to see Best Buy take an aggressive stance on pricing, which it hasn’t been willing to do in the past.
“It feels like Best Buy has gotten up off the mat and has gotten back into the fight in the last year,” Perkins said.
Company executives tamped down hopes for a surge in growth in the coming months, however, noting that sales were expected to remain “slightly negative” through the first half of the year.
Sales ‘in line’ with goals
Sales at stores open at least a year, a key indicator of a retailer’s financial health, fell 1.2 percent in the fourth quarter. While that was even more than the 0.9 percent drop the company announced last month for the first nine weeks of the quarter, Best Buy executives said sales actually picked up in January and were “in line” with goals.
“We gained market share,” Joly told investors during the morning call, “but it came at a cost,” as promotional price cuts eroded profits.
Analysts cautioned that profit margins on computer electronics are razor thin, and that Amazon remains a formidable competitor for Best Buy.
“The question is, where is growth going to come from?” Perkins said. “That is the ultimate problem they face when trying to grow the business down the road as opposed to maintaining where they’re at.”
Best Buy “is playing a zero sum game,” said Aram Rubinson, an analyst with Wolfe Research in New York. “The industry isn’t growing and consumers are getting increasingly price savvy. The only way to steady the ship is to take out costs.”
Best Buy’s financial results came a day after the company reportedly laid off what would amount to about 1.4 percent of its workforce — its biggest job action since July 2012.
Joly acknowledged that some stores saw cuts, but he stressed that savings aren’t coming on the backs of store employees.
The “vast majority” of cost savings have come from squeezing efficiencies out of nonsalary expenses, he said. “Believe me, these reorganizations and head count reductions are not fun for anybody.”
“Sometimes it is inevitable, and you have to do it,” Joly added. “But we’re not declaring victory based on reducing head count.”
Joly said the company continues to invest in people and technology when it serves efforts to build online traffic or bring new customers to stores. A pilot project to put 5,000 tablet computers in the hands of sales-floor workers has proved to be a smart investment, he said.
Workers can get instant access to product information, product availability and competitors’ prices, all while talking to a customer. “We have to adapt to the times,” he said.
A bright spot for the company came in online sales and in Best Buy’s “ship-from-store” service that has been expanded to all 1,400 locations. That program allows stores to fill online orders, which has sped up the delivery window by two full days and saved some $400 million in the cost of returned products.
Online sales increased by 26 percent, compared with an 11 percent bump last year, with sales picking up after the holidays. Joly acknowledged the company “has some catching up to do,” but said that it is gaining market share online as well.
Sales from the company’s website accounted for 12.7 percent of total sales in the quarter, up from 10 percent a year ago. The company replaced its decade-old search engine before the holidays, which it said provided a needed boost in transactions, and that it expects even bigger payoffs in the year ahead.
Half of online purchases are picked up in stores, which the company sees as a competitive advantage over online-only retailers.
“We love that,” said Chief Financial Officer Sharon McCollam, who said it gives store workers the chance to interact and “build relationships” with customers.
“One thing the competition cannot do is give it to them at this very moment.”
Staff writer Steve Alexander contributed to this report. Jackie Crosby • 612-673-7335
© 2014 Star Tribune