Best Buy Is Better But Still Broken

CEO Hubert Joly has Best Buy making money again, but he still has a lot of work to do to fix the company.

Feb 28, 2014 at 11:21AM

Put away those party hats, Blue Shirts, and tell the Geek Squad it's not time to break out the champagne yet.

Just because Best Buy (NYSE:BBY) has returned to profitability does not mean the company has solved the underlying problems that got it in trouble in the first place. It hasn't found an answer to customers browsing at Best Buy but buying online, nor has it found a way to lower its tremendous real estate costs. What the company has done -- and this is an important step on the road to rebuilding -- is cut expenses dramatically.

Best Buy seeks to 'Renew Blue'

Best Buy, under CEO Hubert Joly, has been trying to complete a list of business priorities it has dubbed "Renew Blue." Joly acknowledged in the company's Q4 financial release that cost-cutting is a part of achieving those goals.

"During fiscal 2014 we made substantial progress against our Renew Blue priorities. First, after only one year, we exceeded our original Renew Blue cost reduction target of $725 million by delivering annualized Renew Blue cost reductions totaling $765 million," he said.

While the company kept its expenses down, it also had relatively flat revenue taking in $14.4 billion compared to $14.9 a year before. But with the cost cutting those lower sales were good for a profit of $293 million compared to a loss of $409 million in Q4 2013.

Net income after paying preferred dividends totaled $293 million, or 83 cents per share. That compares with a loss of $409 million, or $1.21 per share last year.

Where are the savings coming from?

When Renew Blue was launched during a Best Buy investors day in November 2012, the initial target was to achieve $725 million in North American cost reduction each year. Having exceeded that goal in 2013 the company plans to raise it to $1 billion in 2014. Methods the company used to reach those savings goals include:

  • Optimization of the field and store operating models in the U.S. and Canada
  • Structural changes to certain compensation and benefits programs; and
  • Ongoing optimization of returns, replacements, and damages.

The additional cost reductions are expected to come primarily from the further optimization of returns, replacements, and damages as well as improvement in logistics and supply chain.

Saving money is nice, but how do you grow?

If Joly only intended to cut his way to profit, his plan might stabilize Best Buy, but it would limit upside. In addition to cutting, though, he has begun to reshape how Best Buy does business and some of those initiatives are also starting to pay off.

"We have enhanced how we serve our customers and have been building key foundational capabilities. Most notably, we have  increased domestic online sales by 20%; significantly increased our price competitiveness; rolled out ship-from-store to more than 1,400 locations; opened 1,400 Samsung and 600 [Microsoft (NASDAQ:MSFT)] Windows stores-within-a-store and completed the first phase of our floor space optimization," he said in the earnings release. 

The company has also improved its website and relaunched its loyalty and credit card programs.

It's a start

Joly deserves credit for getting Best Buy back on solid footing and making significant expense cuts that have largely been achieved without massive layoffs. He still faces a massive problem that Best Buy stores are often not price competitive with online stores. Best Buy does price match with online retailers, but price is only part of the cost of buying electronics.

For example (NASDAQ:AMZN) sells televisions as does Best Buy. Best Buy will match Amazon's price for a TV, but it won't deliver it for free like Amazon. That's great if you can fit a TV in your car and want to schlep it home, but it's not as great if the TV won't and you're not strong enough to wrestle it around. In that scenario it still makes sense to take full advantage of Best Buy's staff then make a purchase on Amazon.

Joly also has to figure out ways to lower prices on cables and accessories that while they might be high margin for Best Buy are much more expensive than they are online. The only scenario where an informed buyer would purchase an HDMI cable from Best Buy is if he needed it immediately. On Best Buy's website the company is selling a six-foot HDMI cable it labels as "Incredibly Affordable" for $14.99. Amazon sells a number of six-foot HDMI cables for under $6.

Still Joly does not have to solve all of these problems all at once. He only has to keep Best Buy moving in the right direction. The company still has massive problems that must be solved going forward but it seems possible that under Joly Best Buy can get there. If he manages to figure out how to actually price match with Amazon then perhaps it's time for party hats and champagne.

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Daniel Kline is long Microsoft. The Motley Fool recommends The Motley Fool owns shares of and Microsoft. 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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