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Electronics retailing giant Best Buy (NYSE:BBY) announced its Q4 and annual results on March 1. The company reported Q4 revenues of $16.71 billion, marginally higher than $16.67 billion in the comparable period last year. It managed to bring down the net quarterly loss to $409 million from $1.81 billion in the fourth quarter of 2011. Best Buy’s results were stable in the fourth quarter due to 11% growth in online sales driven primarily by the price matching strategy in the holiday season [Best Buy 8-K, SEC].

The company’s quarterly domestic segment revenues stood at $12.55 billion, a decline of 0.3% from 2011. This was primarily due to a loss of revenues from 49 big box stores closed down in 2012, partially offset by a 0.9% increase in comparable-store sales and additional revenues from 126 new Best Buy Mobile stand-alone stores. Overall comparable-store sales, however, declined by 0.8% due to a 6.6% drop in the metric in the international segment.

Apart from comparable-store sales, the other closely watched metric in the industry is gross profit margin. This number acquired additional salience this quarter in view of Best Buy’s price matching policy in the holiday season. Gross profit margin for the quarter stood at 22.6%, down from 23.1% recorded last year.

After months of build-up and heightened anticipation, the big dampener was the lack of a buyout offer from founder and ousted CEO Richard Schulze. The company received a minority investment offer from three private equity players, but decided not to accept it as it judged the cost of investment to be excessive for shareholders and also dilutive in nature. Best Buy’s management will now focus on initiatives to turn around the company, paying special attention to comparable-store sales and profitability [Best Buy Says It Got No Offer From Founder Schulze, Bloomberg].

Renew Blue To Turn Around The Company

In order to achieve its objectives for the next year, Best Buy has outlined certain key initiatives under the “Renew Blue” program.

The big focus will be on accelerating growth in the online segment. The company intends to increase online traffic and increase the conversion rate among visitors by providing a more interactive shopping experience. That would mean keeping track of user preferences based on their browsing history and generating recommendations accordingly. The search experience will be further enhanced by revamping the platform and browsing would be made easier by creating product pages that provide a consistent and smoothly navigable experience across devices. This is expected to be done in time for the next holiday season.

The second initiative is aimed at enhancing customer experience across channels, be it in-store or online. In addition to improving the functional experience online, Best Buy has introduced a new metric called the Net Promoter Score (NPS) to track customer satisfaction levels with the company’s service. This will be measured for all customers whether they choose to buy from the company or not. We are of the view that this measurement is a very handy tool to influence and shape behavior. Indeed, the company has found that since introducing the NPS in November as customer satisfaction with its sales associates, service and price perception has improved. Quantitatively, the NPS has shown a 200 basis point growth.

In order to improve gross profit per square foot, Best Buy will focus on stocking more items that generate higher margins. Simultaneously, it will seek to reduce costs through intelligent inventory management and supply chain optimization.

Further cost reductions are planned through real estate optimization and by pruning of SG&A expenses. Around 5-10 big box stores are expected to be closed this year in addition to 49 stores shut down last year. The company hopes to cut down SG&A expenses by $400 million next year by discontinuing non-core activities and eliminating redundant management layers. Savings of around $150 million were achieved over the last several weeks by laying off approximately 400 people at the corporate headquarters [Best Buy Q4 2012 Earnings Conference Call, Seeking Alpha].

The Year Ahead

The capital expenditure estimate for next year has been pegged at $700-800 million and incremental SG&A expenditure at $150-200 million. SG&A expenses for 2012 stood at around $4.2 billion. The bulk of capital spending will be targeted towards improving online, mobile and multichannel customer experience in addition to non-recurring costs associated with developing in-house IT capabilities.

Best Buy declined to provide any earnings or revenue guidance for next year. However, it conceded that the first quarter will be weaker than the previous fiscal year due to two reasons. Firstly, the pre-Super Bowl sales were accounted for in Q4 2012 rather than Q1 2013. Secondly, the first-quarter last year saw some new product launches but nothing of the kind is slated this year.

What we will be watching keenly next year is the outcome of the price matching policy. We think that it is too early to pass a judgement since consumer behavior is extremely difficult to predict and Best Buy’s competitors may decide to engage in an all-out pricing war to capture the market. From the company’s perspective, its long-term survival may hinge on the success of this policy.

We have a price estimate for Best Buy of $16, which will be revised shortly in view of the fourth-quarter earnings results.

Disclosure: No positions

Source: Best Buy's Price Matching Strategy Helps Results As Turnaround Efforts Drag On