Best Buy Co., Inc. (BBY - Analyst Report) had made a remarkable turnaround in 2013 with the stock price increasing over four fold. However, 2014 began on a wrong note with the stock crashing 30% in a single day following dismal holiday sales data and the subsequent trimming of guidance, raising concerns over CEO Hubert Joly’s ambitious restructuring strategy.
The company’s sales fell 2.6% year over year to $11,451 million for the nine weeks ended Jan 4, 2014, while comparable store sales (comps) dropped 0.8% over the same time frame. As per segments, sales at the domestic segment dipped 1.5% to $9,754 million from the prior-year period while comps fell 0.9%. The International segment’s sales waned 8.1% to $1,697 million but comps nudged up 0.1%.
The consumer electronics giant held that intense promotional war, which characterized the holiday season, had significantly impacted its margins and thus compelled a downward revision in its operating margin guidance. The company had cut down prices, at the expense of profits, to compete better with peers such as Wal-Mart Stores Inc. (WMT) and Sears Holdings Corp. (SHLD - Analyst Report).
Best Buy now expects the operating margin to shrink 175–185 basis points (bps) year over year during fourth-quarter of fiscal 2014. Moreover, tight supply of key products, lower traffic and weakness in mobile phones category contributed to lower-than-expected sales.
The only silver lining was Best Buy’s strong online performance amid heightened competition from online giants like Amazon.com Inc. (AMZN - Analyst Report). Online sales at the domestic segment rose 23.5% versus 10% in the prior-year period (nine weeks ended Jan 5, 2013).
The rise of e-commerce could become a potentially catastrophic event for bricks-and-mortar retailers. Amazon has metamorphosed the way consumers used to shop, and the company’s performance over this holiday season bears a testimony to it.
E-retailers have the biggest advantage of not maintaining any stores and as a result command a better pricing technique without denting margins. Bricks-and-mortar retailers falter on this ground as prices can be lowered only at the expense of margins as seen in this holiday season.
Additionally, the competition that Best Buy faces from the retail bellwether, Wal-Mart is a concern. This multinational retail corporation hosts practically everything under one roof, which leads to a highly effective pricing mechanism.
With changing retail techniques, Best Buy has also adopted varied tools to fit itself in the race of survival of the fittest. It has made significant progress in enhancing online sales, inventory management and supply chain execution. Moreover, the company extended its “buy online - ship from store” endeavors to more than 400 outlets.
Moreover, it has reduced an additional $45 million in costs annually, thereby bringing the total cost savings generated to $550 million.
Further, entering into fiscal 2015, CEO Joly has increased focus on the company’s turnaround. To enhance Best Buy’s performance, Joly stated the need for aggressive cost cuts, prioritization of online sales growth and improvement in multi-channel strategy. Joly was appointed the CEO in 2012. Since then, he has closed several non-core operations, reduced staff and simplified the organization structure to run the company more effectively and reinstate its former glory.
On the flip side, Joly’s restructuring strategy that is seemingly on the right track, has failed to deliver the desired results as reflected in the dismal holiday sales. Hence, it is not easy to comprehend the situation at Best Buy at present until we get a clear picture.