Best Buy: Expect Gross Margins To Rise In 2013

| About: Best Buy (BBY)

Best Buy (NYSE:BBY) reported fairly positive earnings this week. Hubert Joly, who joined last August, has implemented a turnaround strategy which seems to be gaining traction. The earnings were a breath of fresh air given the past performance of the company.

While revenue is important, the major concern going forward will be regarding gross margins. Joly has clear plans in place that I believe will help grow gross margins for the year.

While big-box retailers may have a difficult time due to a shift in consumer preferences for online shopping, Best Buy has a clear strategy to manage its supply chain.

Unlike Amazon (NASDAQ:AMZN), which has a limited number of distribution facilities, Best Buy has a harder time given it has hundreds of stores. Plans such as consolidating packages and transporting trucks that are fully loaded will help maximize supply chain operations. All of this will reduce shipping expenses, which will drive down the cost of goods sold.

Best Buy will be cutting down on its CD/DVD business. If you have been to a Best Buy, then you know the CD/DVDs section takes up a massive amount of square feet. This is not good considering these products have low margins and are often not in high demand. The company will then use the extra space from the reductions to focus on mobile and accessories. This has much higher demand and the margins are better than the CD/DVD business.

Lastly, the company plans on focusing on reducing occupancy cost as well as labor cost. When I mean reducing labor cost, they will simply allocate workers based on the level of consumer activity seen according to each store. Having a full staff working when the store is not busy is pointless and expensive. Best Buy is also in a strong position to renegotiate leases. There are not many potential tenants to fill an empty space if Best Buy were to vacate. There are also not very many big-box retailers expanding. So Best Buy has significant bargaining power with its landlords.

I believe Best Buy has a compelling story here. Joly is clearly focused on maximizing efficiency, while remaining competitive on the pricing front. He has outlined a clear strategy, which will help reduce COGS. This should drive gross margin growth for 2013. The market seems to have been concerned about margins before, but Joly's strategy should help calm investors.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BBY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.