Best Buy Isn't Dead Money, It's A Turnaround You Shouldn't Miss

Mar.28.14 | About: Best Buy (BBY)

Summary

Best Buy’s share price drop this year has opened up value in the stock.

Best Buy’s focus on the online channel and initiatives such as ship-from-store should help it gain market share.

Best Buy has employed a number of cost-cutting strategies and is looking to reduce costs by $1 billion going forward.

Best Buy (NYSE:BBY), the world's largest electronics chain, is having a forgettable 2014. Shares are down 35% as Best Buy has struggled due to declining retail traffic, incremental investments in structural and promotional pricing, and the negative impact of its new credit card agreement. In addition, increased product-related warranty costs, and lower rates on mobile service plans have also hurt the company and put an end to its turnaround prospects.

However, Best Buy has done very well with respect to cost-saving strategies through a well-defined program - Renew Blue - which has allowed it to see gains in the online business. Best Buy's online business expanded more than 25% in fiscal 2013 as compared to 11% in the preceding year. So, can Best Buy's positives outweigh its negatives in the long run?

Solid strategies to drive growth

As far as the current year is concerned, Best Buy has concrete strategies lined up. The company is targeting dominance in digital sales with improved technology-driven products and services that will enhance the customer experience.

Best Buy had launched its Renew Blue program in the beginning of the year. The program consists of major initiatives such as focus on online growth, improving the multi-channel customer experience, lowering cost of goods sold to increase supply chain efficiency, accelerate revenue and gross profit through enhancing store space optimization and merchandising, etc.

Best Buy is enhancing the online customer experience, based on how, where, and when customers want their products. It is also planning to bring in many new search elements in online shopping, such as search engine, tools, recommendations and product-price information. This tool will definitely will help customers to find products they wish to purchase, eventually providing them a better online experience.

With respect to improving its multi-channel customer experience, Best Buy is focused on redefining the processes it has in place, such as implementing a new field and operating model, strengthening the talent pool in critical areas of e-commerce, personalized marketing and improving the performance management system by rationalization of key matrices. These initiatives will no doubt support the multi-channel customer experience and probably help Best Buy gain market share.

Focusing on profitable means of driving growth

Best Buy considers its supply chain as its USP (unique selling proposition). The company has a powerful network with strategically-located distribution centers. With an improved ship-from-store strategy, the company has realized substantial growth, enhanced online conversions and has also benefited from stores comps.

Best Buy has brought the ship-from-store facility to all of its 1,400 stores and it will look to fulfill demand with its 8 well-located distribution centers. This move will definitely lead to speedy delivery of online products and services to its entire customer base, along with lower costs.

Optimization of floor space is also a key initiative of Best Buy. Therefore, the company is focusing on devoting more space to more profitable product categories such as mobile phones and tablets through existing and new vendor partnerships.

In addition, Best Buy has opened 1,400 Samsung (OTC:SSNLF) and 600 Microsoft (NASDAQ:MSFT) Windows stores-in-stores, thereby bringing in more customers to its destinations. Best Buy also operates Apple (NASDAQ:AAPL) product showcases in multiple stores. Best Buy is undertaking many initiatives and is trying to attract new vendors to showcase their products and services.

Lining up against peers

Sony's (NYSE:SNE) plan to close down 20 out of 30 stores in the U.S. could prove beneficial for Best Buy. The company can capitalize on this opportunity to drive in more customers to its stores who are looking to purchase electronic gadgets such as Sony televisions, digital cameras, audio equipment, etc. Best Buy is also planning to run a product showcase for Sony, which is an added advantage for the company to maximize its market share.

Best Buy's cost-cutting initiatives have helped it reduce prices for its products and services to remain competitive with peers such as Amazon (NASDAQ:AMZN). Best Buy is planning to cut its annualized costs by $1 billion so that it can continue to compete against peers.

Conclusion

Best Buy has turned in a very bad performance this year, but that has brought down the stock to attractive valuation levels. It has a trailing P/E of 17 and a forward P/E of 10, giving investors an ideal point of entry. Moreover, Best Buy's projected annual earnings growth rate for the next five years is 14.54%, which further indicates that the stock could be a good buy at its cheap valuation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.