Can Best Buy Achieve 3 of Its Main Goals?

If Best Buy can't achieve its goals, the company's showroom business may have nothing left to show.

Feb 24, 2014 at 5:45PM

Best Buy (NYSE:BBY) either is a vital part of the retailing landscape or it's doomed to disappear due to fierce competition. The company has become almost synonymous with showrooming, but has been fighting back by offering to match the prices of its largest competitors, and trying to cut costs.

In the last quarter, CEO Hubert Joly laid out several targets for this year. The company's very survival may depend on whether it can reach these goals.

The first cut may not be the deepest
When a sports team wants to improve its roster, many say the first cut is the deepest. However, in Best Buy's case, the company's future cuts may prove to be far deeper. At the end of 2012, the company announced it would close 50 big-box locations and open 100 smaller mobile stores in 2013.

In theory, this move would give Best Buy more points of presence with less cost. Apparently more of the same is coming, as the first goal the company has set for 2014 is to "more quickly and deeply lower our cost structure."

Best Buy faces competition from companies like (NASDAQ:AMZN) in general merchandise and GameStop (NYSE:GME) in gaming. In their respective quarterly earnings, Amazon generated a 20% sales increase, while GameStop produced a 19% increase. Given that Best Buy's sales over the holidays declined by 2.6%, clearly something is wrong.

A natural place for Best Buy to try to cut costs would be with its selling, general, and administrative expenses. SG&A expenses used 21.9% of revenue, which was lower than the 23.4% from last year. However, further cuts may be challenging, as Amazon spent about 24% of revenue on SG&A and GameStop spent 21.3%.

Given that Amazon and GameStop are both growing much faster than Best Buy and their SG&A expense percentage isn't all that different, it seems that Best Buy will have to either cut staff or close locations to make a real dent in costs.

Less staff means lost sales due to higher wait times and potentially inferior service. Closed locations would mean lost sales and points of presence. If Best Buy meets this goal, the result may not be what investors are hoping for.

Room for improvement that's obvious
The second goal Best Buy hopes to meet this year is to "improve the multi-channel experience." Amazon is arguably the king of online retail and attempts to make sure it has top sellers in every category ready to ship immediately. In the last quarter, the company increased its fulfillment expense by 29% year over year as part of an effort to make sure its customers get their orders quickly.

GameStop has an advantage over Best Buy in that many items it sells are downloadable. In addition to more than 6,000 locations, GameStop has more than six times the locations of a traditional Best Buy.

Best Buy seems to have a problem understanding that customers don't like the word "unavailable." On Best Buy's website, three of the top 10 laptops and two of the top 10 flat-screen televisions are either unavailable for shipping or aren't available in a local store for three to five business days. To suggest the multi-channel experience needs improvement is an understatement.

A bright spot, or a temporary blip?
The third goal Best Buy hopes to accomplish, is to "grow the online channel." On the surface, the company's near-24% sales growth in online sales over the holidays seems to argue this is happening. The company said its online growth came from a higher average order, increased traffic, and improved inventory.

However, as we just saw, Best Buy still has challenges delivering top-selling products through its online channel. In addition, online sales represent just over 11% of total revenue, compared to nearly 15% at GameStop.

Final thoughts
In the end, there is both good news and bad news for Best Buy. The good news is that the company's goals target some of the critical challenges facing the company. Achieving these goals will help results and could boost earnings. The bad news is that the company has been talking about some of these goals for more than a year and still hasn't fixed several obvious problems.

If Best Buy can't meet these goals in 2014, it may not matter how good of a showroom it is, there won't be a Best Buy to show anything.

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Chad Henage has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of and GameStop. 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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