Best Buy Plummets As Turnaround Stalls, Should You Buy?

Intensified pricing environment results in renewed strategic uncertainties for investors

Jan 22, 2014 at 6:21PM

Shareholders in Best Buy (NYSE:BBY) are not pleased at all with the holiday results posted by the electronic retailer. After investors doubted whether the company would survive 2013 a year ago, the business has made a strong turnaround over the past year. Shares have roughly risen four fold from their lows last year.

The sell-off over the past week is warranted as progress might have halted and could have reversed.

Disappointing holiday results
For the nine week period ending Jan. 4, Best Buy reported sales of $11.45 billion which was down 2.5% compared to a year earlier. Domestic sales fell by 1.5% to $9.75 billion, due to a 0.9% decrease in comparable store sales.

International revenues were down by 8.1% to $1.70 billion as adverse currency movements and 35 store closures in China and Canada affected sales. 

One bright spot was online sales which rose by 23.5%, compared to 10% growth in the year before. Unfortunately this could not reverse declining sales in the stores as online sales make up just 11.5% of total revenues.

Best Buy is not competitive?
The company called the holiday season  "intensely promotional" after already warning ahead of Black Friday about price competitiveness which has lasted the entire holiday period.

The company stuck to its promise to customers, under its "Renew Blue" transformation plan by offering competitive pricing. This hurts non-GAAP operating earnings by an expected 175 to 185 basis points in the fourth quarter. Last year's non-GAAP operating earnings made up just 5.7% of total revenues, and this quarter will be even uglier.

This promise to customers came at a huge cost. While CEO Joly pointed out a higher market share, a higher Net Promotor Score and accelerating online sales growth, the drawbacks of the strategy where much bigger. The matching pricing strategy had huge financial consequences. Some operational issues arose as well during the time period including supply chain constraints for key products, disappointing customer traffic and a weak mobile phone market.

Implications for fiscal 2015
The market might have become a bit complacent with Best Buy's recovery in the calendar year of 2013, yet CEO Joly is feeling the urgency.

For the coming year, Joly will focus on achieving a lower cost structure. Other key ambitions include the focus on online sales growth, innovation on the multi-channel customer experience, and enhancement of marketing efforts. Perhaps new lay-offs and store closures could be in the planning for this year.

Investors are not convinced
On the back of the poor results, shareholders triggered the panic button in the wake of the news release. Shares fell a combined 35% on the two days following the news, sending roughly $4.5 billion in value into smoke on the back of the holiday sales report.

Joly admitted Best Buy got "out-competed" by its competitors and these remarks were causing shivers among investors. Price competition is an issue, but the real concern is that lower pricing did not result in higher volumes, putting even more pressure on earnings. The price matching strategy of the firm, to compete with the likes of (NASDAQ:AMZN) is not working. Therefore a big fourth quarter loss should be expected, causing further worries and doubt about the sustainability of the business and its current strategy. Amazon's lack of store expenses and significant economies of scale make it very difficult for Best Buy to compete effectively.

Best Buy furthermore noted that the promotional environment is lasting, and did not end with the holiday season passing by. While 2013 might have been a year of improvements, which has been applauded by the market, improvements might have stalled and possibly reversed by now. The start of 2014 has been disappointing for Best Buy and it could become a very difficult year for both shareholders as well as the company.

Fool contributor rhp broens has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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