Best Buy's Sales Suffer Due To Weak Holiday Season And Bad Weather

Electronics retailing giant Best Buy posted revenues of $14.47 billion in Q4 fiscal 2014, a 3% decline as compared to the prior year comparable quarter. (Fiscal years end with January.) Comparable Store Sales for the quarter declined 1.2%. Both domestic and international revenues declined. Additionally, the company saw non-GAAP diluted EPS of $1.24 in Q4, which was better than expected, as it continued to record cost savings through the Renew Blue program.

Best Buy’s gross margin fell by 210 basis points annually to 20.2%. Domestic gross margin was hurt by factors such as incremental investment in structural and promotional pricing, negative impact of the new credit card agreement, increased product warranty-related costs associated with higher claims frequency in the mobile phone category and lower attachment rates on mobile service plans. The international gross profit dipped due to increased promotional activity and a shift to lower margin products in the Canadian business. However, SG&A expenses as a % of revenue decreased to 16.1% as compared to 16.9% in Q3 fiscal 2013. This was attributed to cost savings through the Renew Blue program, better expense management and reduction in labor-associated costs at stores. This led to an annual expansion in operating margins to 3.2% in Q4 fiscal 2014, as compared to a loss of 1.2% in Q4 fiscal 2013.

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Snapshot Of Q4 2014 Results

Best Buy’s sales suffered in the quarter due to declining retail traffic, intense promotion, fewer holiday shopping days, and severe weather. In the consumer electronics category, sales were weaker than expected and the phenomenon of showrooming continued to gain traction among customers who are shifting to the online channel.

Domestic revenue declined by 1.8% annually during the quarter, as a result of a comparable store sales decline of 1.2% (as noted). Excluding the negative impact due to certain short-term measures, the comparable stores sales decreased by 0.6% annually. The growth in computing, appliances and gaming categories was more than offset by decline in other categories such as digital imaging, movies and home theater.

The domestic comparable online sales rose by 25.8%, as compared to 15.1% growth in the previous quarter, owing to factors including higher traffic, growth in average order value, increased inventory at the online channel and higher conversion rate on both the core and mobile sites. We believe this metric will continue to post strong growth in the future, as Best Buy is taking several measures to enhance its e-commerce channel.

The international revenue fell by 9.6% on account of factors such as 1.7% decrease in comparable store sales, store closures in China and Canada, and adverse currency effects. Declining industry trends in Canada and Mexico contributed to the significant drop in comparable stores sales in these markets.

Progress Was Seen On The Renew Blue Program

At the beginning fiscal 2014, Best Buy initiated six key initiatives under the “Renew Blue” program to turn around the company. These include: 1) accelerating online growth; 2) enhancing the multi-channel customer experience; 3) increasing revenue and gross profit per square foot to enhance store space optimization and merchandising; 4) driving down cost of goods sold through increased supply chain efficiencies; 5) continuing to gradually optimize the U.S. real estate portfolio; and, 6) further reducing SG&A expense as a percent of sales. The company made progress against each of these strategic initiatives during the quarter, and will continue to invest in them going forward.

During the quarter, Best Buy saw consumers shifting to the online channel in large numbers. Every metric that the company uses to track the growth of this channel showed improvement. As a result, online sales constituted 12.7% of the total domestic sales, up from 10% last year. The Net Promoter Score which measures satisfaction levels for both customers that buy and don’t buy products, rose by 300 basis points annually. However, this progress also came at a price. Best Buy said that since online sales have a higher mix of lower margin hardware products as compared to high-margin services and accessories, its profitability was affected.

Optimization of floor space was undertaken by devoting more space to profitable product categories such as mobile phones and tablets. In addition, the company realized $200 million in cost savings for the whole year through reduction in its SG&A expense. This resulted in total annualized costs savings of $765 million, which far exceeded the company’s target of $725 million in savings.

Our price estimate of $27.84 for Best Buy is at a 6% premium to the current market price. We will update our valuation shortly in view of the Q4 2014 earnings release.

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Source: Forbes Business

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