Best Buy Swings to a Profit

Best Buy's fourth-quarter report showed that turnaround efforts may be paying off as the company vies to compete with rivals Wal-Mart and Amazon.

Mar 4, 2014 at 4:15PM

Best Buy (NYSE:BBY) was without a doubt one of the best-performing stocks last year, as investors cheered the company's seemingly successful turnaround efforts. However, the stock has not fared nearly as well in 2014, down more than 30% on worries that the strategy may prove to be insufficient. However, the company's most recent earnings report showed considerable strength, bending a loss last year into a profit that moreover beat analyst expectations. As such, analysts believe the company's cost-cutting efforts may increase its competitive edge against rivals Amazon.com (NASDAQ:AMZN) and Wal-Mart Stores (NYSE:WMT).

Best

Source: Ivan Oyarzen via Wikimedia Commons.

Renewing blue
While analysts had on the whole expected Best Buy to deliver a profitable quarter, the company's results came in far ahead of expectations. The company earned some $0.83 per share for the fourth quarter compared to a loss of $1.21 a year ago. Non-GAAP earnings per share of $1.24 easily beat the $1.01 consensus, while revenue of $14.47 billion was down 3% year over year and missed the consensus estimate by around $200 million.

Largely, the positive results are due to the company's Renew Blue turnaround strategy, which mainly involves a large number of cost cuts. Best Buy has by now exceeded its original goal of $725 million in annualized cost cuts, now having reached some $765 million in savings. This was achieved by laying off staff, eliminating layers of management, closing unprofitable retail locations, and selling its stake in a European joint venture.

Obviously, the holiday season was a challenging one this year, with brick-and-mortar stores reporting decreased traffic across most retail industries. Making matters worse was a challenging discount environment, in which virtually all retailers vied to compete on price, putting pressure on margins throughout the sector. Considering these factors, it seems like Best Buy did rather well.

These cost-cutting initiatives should allow Best Buy to more effectively compete with discount retailers such as Wal-Mart, which have over the years been steadily eating into the company's market share. Wal-Mart's pricing strategy was rather cheeky this past holiday season, kicking off the discounts a week earlier than Best-Buy. Wal-Mart's monstrous size allows it to more easily compete on price than many rivals, although the company's fourth quarter was not particularly thrilling to analysts; profits declined 21% year over year.

Taking on Amazon
Although Wal-Mart is a serious competitor, Best Buy may have more to fear from Amazon. The company has rapidly overtaken many of its rivals due to ease of use and competitive pricing, especially in its consumer-electronics business. Like rivals, Amazon made a big pricing push over the holiday season, although its fourth-quarter results severely disappointed investors. Earnings per share missed by $0.18 and revenue by around $470 million. So far, it seems as if Amazon has failed to kill off Best Buy.

Images

Source: IntelFreePress via Wikimedia Commons.

Partly, this is due to Best Buy's turnaround strategy. The company's price-matching policy has turned it from a showroom into a serious competitor, and Best Buy has now also rolled out a ship-from-store system in some 1,400 locations. What may prove to be particularly useful is the company's "store-within-a-store" plan, in which suppliers such as Apple get a dedicated space within Best Buy retail locations. This presumably would give Best Buy an edge over Amazon in terms of being able to actually test out your gadgets before buying them. Moreover, the company has been making a push to increase online sales, apparently successfully, with domestic online sales up 20%.

The bottom line
After a dramatic rise in 2013, Best Buy has had a poor start to the year, losing more than 30%. However, its most recent earnings report showed considerable strength, indicating that the company's turnaround and cost-cutting efforts are starting to gain traction. Indeed, Best Buy has by now exceeded its cost-cutting goals and, along with a number of other initiatives, is looking to increase its competitive edge over key rivals Wal-Mart and Amazon.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com and Apple. 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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