Friday, February 21, 2014

Best Buy Will Make A Comeback

The decrease in stock price Online Deals ( BBY) and negative outlook for the company is nothing but herding behavior. It seems to me that a majority of the investors have solely focused on the figures reported in holiday revenues. A little more time should have been given to the statements of the president and CFO of Best Buy.

In the short-term, the results were obviously not very encouraging but I would prefer to interpolate these facts and figures and to look at the bigger picture. I have many reasons to believe that the decline in the price of BBY since the announcement of fiscal year 2014's holiday revenue was uncalled for. In my opinion, the management made a smart choice to be price competitive. The idea of investment in pricing came with a higher than expected cost and non-GAAP operating income for the fourth quarter is expected to be 1.75 percent to 1.85 percent lower than last year. This plan affected the margins negatively but in the long term positive results should be expected from this move. Despite the decline in sales the company actually gained more share in the domestic market. Also, a higher margin can be expected in the coming years because the company has a number of initiatives to be executed that will both increase revenue and cut costs.

According to Hubert Joly, due to the company's price competitiveness and improved customer experience both online and in-store, the company gained more market share. The company's Net Promoter Score experienced an improvement of 4 percent. The company also made substantial progress compared to several other Renew Blue priorities that will leave them well-positioned as the company enters fiscal year 2015. That progress was comprised of strong inventory management, comparable online sales growth of 23.5 percent, and very strong retail execution during Power Week. The company also executed a transformational supply chain that included giving far greater access to total company inventory through its recently launched ship-from-store ability that is available in more than 400 stores. The company also decreased its annualized costs by $45 million as of January 16th, 2014. This step brought the company's total annualized cost reductions for Renew Blue to $550 million.

Although, the company's revenues were unfavorably obstructed by the supply constraints for key products, an unsatisfactory mobile phone market, the aggressive promotional activity during holiday period and significant decline in store traffic between Christmas and Power Week, looking ahead this performance reinforces the company's resolve and its sense of urgency concerning its transformation. Going into fiscal year 2015, the company's priorities are to grow its online channel at an accelerated pace, lower its cost structure more deeply and quickly, enhance the innovation and improvement of the multi-channel customer experience. It also seeks to improve its marketing approach and effectiveness especially related to personalization, targeting of buying occasions and customer segments. The company is also attempting to strengthen and grow its Greek Squad services business.

It is important to note that the company's results did not warrant such deterioration in its stock price. I accept that 0.8 percent negative growth in comparable sale is not a good figure but the company showed reasonable improvement on a year-on-year basis compared to last year. Further, the company fetched 0.1 percent growth in international comparable store sales and that is much better result compared to the negative 10.3 percent growth during the same period last year. Best Buy's stock value was largely affected by the performance of its domestic business segments. Finally the company had to face a 2.6 percent decrease in total revenues and negative growth rate of 0.9 percent in comparable store sales. However, in my opinion, the market overreacted and the company will regain a major chunk of its lost market capitalization in the coming years.

My Stance

I have evaluated three aspects of the company that are keeping me optimistic about its future. First, the company's improving operational proficiencies. The company is managing its inventory better and in turn its stores are becoming distribution centers. The company can now ship products from all of its big-box stores and this phenomenon will improve both revenues and margin for online as well as in-store sales. Second, the company's management has plans to cut costs by $725 million. Last quarter's SG&A costs were reduced from $2.19 billion to $2.05 billion and that is a fruitful display of this plan's successful execution. Third, management further plans to refurbish the company's website. Enriched product review capabilities, single sign-on for reward members and account holders, enhanced navigation and amplified cross selling are some examples of the changes management has already made to the company's web platform.

I am not convinced that the market should have reacted this way and in my opinion this whole destruction in Best Buy's price was led by hysteria and herding. Best Buy will regain its lost market capitalization in the upcoming years.

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