Best Buy

Best Buy (NYSE:BBY) has stepped up its efforts for improvement, but the company's results haven't led to investor jubilation. On the other hand, results haven't led to investor panic, either. This leaves Foolish investors to wonder if the company is capable of a long-term turnaround. While future success is far from a guarantee, Best Buy has found ways to decrease shipping speeds, improve comps performance, grow online sales, take advantage of consumer insights, and more. 

Effective initiatives
Best Buy wanted to improve its shipping speeds, which of course pleases customers. With all 1,400-plus locations now offering ship-from-store service, and eight strategically located distribution centers, Best Buy is delivering two days faster than in the past. By using 1,400-plus locations to ship-from-store and eight strategically placed distribution centers, Best Buy is able to reduce fuel costs, simply because of reduced travel distances. And by delivering faster than in the past, it keeps its customers happier. But that's not all.

Best Buy had been losing $400 million per year because of returns and open-box items. Best Buy found a solution to this problem, which was to sell those returns and open-box items online. These items might be priced for less, but sales should greatly reduce losses. At the same time, this move will add to the top line. 

Sticking with the cost-reduction theme, Best Buy's Renew Blue initiative was expected to lead to cost savings of $725 million in 2013. Instead, it led to cost reductions of $765 million.Best Buy appears to be heading in the right direction when it comes to cost-cutting. However, demand is still a concern. 

Comps (same-store sales) performance
In fiscal-year 2013, Best Buy's comps declined 3.5%. In fiscal-year 2014, Best Buy's comps declined just 0.8%. If you look at a smaller sampling, fourth-quarter comps in fiscal-year 2013 slipped 1.4%, whereas fourth-quarter comps in fiscal-year 2014 declined 1.2%, indicating a slight improvement.

Comps are the best way to measure demand since they exclude new-store openings and show if customers are loyal to the brand. According to Best Buy, the consumer-electronics market has been weaker than expected recently. For example, CEO, Hubert Joly, said in a fourth-quarter earnings release:

"The fourth quarter was an environment of declining retail traffic, intense promotion, fewer holiday shopping days and severe weather. In the face of these unusual circumstances, our strategy to be price competitive and provide an improved customer experience resulted in market share gains in a weaker-than-expected consumer electronics market."

With a lack of wage growth opportunities for the average individual, disposable income isn't what it used to be. This, in turn, means that consumers are less likely to spend on electronics. For this reason, Best Buy expects similar comps numbers through the fourth quarter of fiscal-year 2014. This shouldn't necessarily be looked at as a negative. Forecasting flat comps in a consumer environment where specialty electronics retailers have seen total sales go from $109.9 billion in 2007 to $95.9 billion in 2013 isn't so bad. Best Buy is also showing improvements in other areas. 

Online performance and Athena
In the fourth quarter of fiscal-year 2014, Best Buy's online sales increased approximately 25% year over year. This is an important result considering online sales represent 12.7% of total sales. Given long-term trends, it should be expected for online sales to become larger, which could be a positive for Best Buy.

Best Buy is also implementing its Athena initiative. This pertains to consumer insights. With Athena, Best Buy will be able to gather personal information on its customers based on past purchases, browsing history, geographical locations, and demographics. Best Buy will then use this information to personalize email messages from a marketing perspective. This should increase its sales potential. 

The power of risk-taking
Best Buy needs to take risks like Athena. In 2009, Best Buy had a 33.5% share of specialty electronics retailers. In 2013, that number shrunk to 31.3%. While this indicates declining market share, Best Buy is still by far the biggest in the industry.

For instance, in 2013, Apple (NASDAQ:AAPL) "only" had a 15% share of the market. That said, Apple's market share in the specialty electronic retailer market in 2009 was just 5.9%. Also consider that Apple only has 410 store locations, whereas Best Buy has 2,000 locations. 

The demand for Apple products relates to the strong brand the company has established, high-end products that high-income consumer can afford (and that some middle-income and low-income consumers will splurge for), and exceptional customer service.

This isn't meant as a dig on Best Buy. It's meant to point out that while Best Buy is a potential turnaround play, Apple is still right in-line with consumer demand. 

Radio Shack (NYSE:RSHCQ) finds itself on the other end of the spectrum. In 2009, it had a 5.5% share of the specialty electronic retailer market. In 2013, that number shrunk to 4.5%. Radio Shack has suffered from image problems that it caters to an older consumer -- proven by its Super Bowl commercial. If Radio Shack continues to suffer and lose share, it has the potential to help Best Buy. This wouldn't be a major market-share gain, but every little bit helps.

The Foolish takeaway
Best Buy is still facing headwinds, especially the decline in consumer demand for electronic devices. On the other hand, Best Buy has seen comps improvements (likely to remain stagnant in the near future/not necessarily a negative), sales are growing online, costs are being cut, and consumer insights via its Athena initiative should help personalize marketing and drive the top line.

Best Buy is still a higher-risk investment, but unlike some other retailers out there, a turnaround is a realistic possibility. As always, please do your own research prior to making any investment decisions.


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of 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.