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Best Buy Company, Inc. (BBY - Analyst Report) posted second-quarter fiscal 2014 earnings of 32 cents a share that surpassed the Zacks Consensus Estimate of 12 cents, and rose substantially by 23.1% from 26 cents earned in the year-ago quarter as effective cost management offset soft top-line performance.

Including one-time items and discontinued operations, this Zacks Rank #2 (Buy) stock reported quarterly earnings of 77 cents a share sharply up from earnings of 4 cents in the comparable prior-year quarter.

The company is undergoing through a turnaround program including price match policy, multi-channel strategy, multi-year cost reduction program and closing of some big box stores. Best Buy in the quarter has been succeeded in lowering its cost by $65 million, thereby bringing the total reduction to $390 million out of $725 million targeted from the North American business.

Management is undertaking competitive pricing strategy and making investments in areas such as online, mobile, the multi-channel approach, optimum utilization of floor area and refurbishment of its website (bestbuy.com) functionality. Best Buy also initiated “buy online - ship from store” endeavors in 50 outlets.

Moreover, the company is leaving no stone unturned in wooing consumers and capturing incremental revenue, as evident from its strategic initiative of opening "Samsung Experience Shops" within its stores. Taking the initiatives further, Best Buy also entered into partnership with Microsoft Corp. (MSFT - Analyst Report) to roll out “Windows Store” across its 500 outlets in the U.S. with an additional 100 in Canada.

Best Buy also completed the divestment of its 50% stake in Best Buy Europe to Carphone Warehouse Group, the joint venture partner in the same, and received $526 million, net cash plus $123 million in cash from the sales of shares obtained on account of divestment.

The move would help this consumer electronic retailer to concentrate more on its U.S. operations, which has been facing a stiff competition from industry bellwethers such as Wal-Mart Stores Inc. (WMT - Analyst Report) and Amazon.com Inc. (AMZN - Analyst Report). We believe that the step to offload stake in Best Buy Europe would augment its return on capital employed.

Coming to the results, total revenue fell 0.4% to $9,300 million, and also fell short of the Zacks Consensus Estimate of $9,365 million. Comparable-store sales edged down 0.6% compared with a decline of 3.3% in the prior-year period.

Adjusted gross profit slid 2.5% year over year to $2,205 million during the quarter due to weak top-line performance, whereas gross margin contracted 50 basis points to 23.7%. However, adjusted operating income increased 13.8% to $206 million, whereas operating margin expanded 30 basis points to 2.2%.

Segment Details

Domestic segment revenue inched up 0.1% to $7,809 million due to the opening of 57 net new Best Buy Mobile stand-alone outlets, partly offset by 0.4% decline in comparable store sales owing to the disruptions as a result of opening of Samsung Experience Shops and Windows Stores combined with store area optimization.

Domestic online sales came in at $477 million, while comparable online sales jumped 10.5% because of improved traffic and increased average order value.

Robust growth in mobile phone and appliances was witnessed during the quarter. However, this was offset by decline in gaming and digital imaging.

The segment’s adjusted gross profit fell 1.3% to $1,872 million during the quarter, while gross margin came in at 24%, down 30 basis points due to higher costs associated to product warranty and increased investments.

International segment revenue tumbled 2.9% to $1,491 million because of closure of 15 big box stores in the prior year in Canada and a decline of 1.8% in comparable-store sales. The drop in comps was due to sluggish demand for consumer electronics and competitive environment in Canada but partially offset by rise in demand in China on the back of promotional strategies.

The International segment’s gross profit dipped 8.8% to $333 million during the quarter, while gross margin shrunk 150 basis points to 22.3%, reflecting lower margin product mix forming part of revenue generated from China and increased promotional activities.

Other Financial Details

Best Buy ended the quarter with cash and cash equivalents of $1,910 million, long-term debt of $1,634 million and shareholders’ equity of $3,605 million.

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