Is Renew Blue Paying Off for Best Buy Co., Inc.'s Shareholders?

Following Best Buy's (NYSE: BBY  ) roller-coaster ride over the last few years has been a confusing experience. At times, analysts are falling over themselves to tout the company's alleged successful turnaround. At other times, the financial media slams the company, arguing that it's over the hill and going nowhere. Now, the company has pulled off a very sizable earnings-per-share beat. On the other hand, the company gave some rather uninspiring guidance going into the rest of the year. Which begs the question: Is the "Renew Blue" campaign working or not?

Mixed messages
Best Buy's first-quarter report gave off some mixed signals on the company's health. On the one hand, the company delivered a big earnings beat. It reported EPS of $0.33, up from $0.32 a year ago and smashing the $0.20 consensus estimate. On the other hand, revenue of $9.04 billion missed the $9.21 billion analyst consensus, declining 3.3% year over year. Furthermore, same-store sales declined by 1.3%, which was at least in line with the company's own projections, if not analyst expectations.

On the face of it, this is mostly good news from a bottom-line perspective. The company bent last year's net loss of $81 million into a net profit of $461 million, which is encouraging. However, the report nevertheless sent the stock down, more likely than not due to some brief comments on what management expects from the rest of the year.

Following industrywide weakness in consumer electronics, the company expects overall softness in several electronics categories to carry on into the second and third quarters of the year. Smartphones especially are expected to underperform as consumers wait for high-profile new product launches, which will be arriving later this year. This translates into estimates for a low-single digit drop in same- store sales in the second and third quarters.

Progress being made
Despite the Street's unfavorable reaction to the company's most recent numbers, it seems to me as if the Renew Blue program is paying off. An EPS beat as well as keeping this figure stable is no small feat considering the drop in revenue, which is evidence of the company's strong execution. A big part of Renew Blue is the cost-cutting side of things, which is obviously stabilizing the bottom line. This cost- reduction program has now been increased by another $95 million, bringing the total target to around $1 billion.

Renew Blue is also a program that aims to optimize the brick-and-mortar shopping experience by offering things that online retailers cannot. This means focusing on advice and service, which gives shoppers a more personal experience. Other initiatives include store-within-a-store spaces for top electronics makers, which totaled around 2,000 locations by the end of fiscal 2014. Also, the company is working on beefing up its online sales and has rolled out a ship-from-store system in some 1,400 retail locations.

If these results still seem uninspiring, compare them to another company operating in the space, RadioShack (NYSE: RSH  ) . Without a serious turnaround plan of its own, the company is moving closer and closer toward bankruptcy. Earlier this year, it announced a massive round of store closings, which was subsequently blocked by its creditors. These creditors have now set a limit of 200 store closings per year; and without this cost-cutting option, things look grim indeed. Last year, the company lost around $400 million and ended the year with around $180 million in cash, which is likely to be burned up this year.

The bottom line
There is no doubt that Best Buy operates in a tough market, as consumer- electronics sales are expected to remain soft throughout the next few quarters. However, the company seems to be making significant progress with its turnaround plans, having managed to keep earnings stable on dropping revenue, in part due to aggressive cost-cutting measures. As the plan matures, it seems too early to give up on the electronics chain, which is still doing considerably better than the competition.

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