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When Will Best Buy Get it Right?

Last year's market darling retailer continues to be a dud in 2014. Shares of Best Buy (NYSE: BBY  )  opened lower on Tuesday after posting another disappointing quarter. 

Revenue slipped 4% to $8.896 billion, just shy of the nearly $9 billion that analysts were targeting. Store-level performance continues to be a problem with comps slipping 2% at its domestic stores.

Online sales soared 22% and now account for nearly 8% of Best Buy's domestic revenue, but that only makes the chain's comps look worse. The backpedaling retailer pads its comps by adding sales into the mix. That may seem fair for orders placed through the website and picked up at the store or for online orders placed inside the store and even for orders that it's now shipping at the local store level, but it's unfortunate that so many chains these days are blurring store-level performances by dividing traditional e-commerce sales into existing stores.

Thankfully it wasn't all bad at Best Buy. Adjusted earnings climbed from $0.32 a share last year to $0.44 a share this time around. CEO Hubert Joly's been serious about shaving costs without sacrificing the customer experience, proven by seeing its Net Promoter Score move higher despite slashing SG&A overhead.

However, with adjusted gross margins declining slightly and Best Buy warning that it sees negative comps through the next two quarters it's hard to get too excited here. Shares of Best Buy more than tripled last year -- up a spectacular 237% -- on faith that it was turning things around. Joly's done a solid job in polishing the brand and keeping costs in check but until sales begin moving higher it's hard to see the stock following suit.

What we have in Best Buy is a consumer electronics giant that is blowing away analyst profit targets with ease but failing to get its chin above the top-line bar that Wall Street is setting. We saw this happen three months ago, and Best Buy had to play Grinch to holiday shopping expectations in the quarter before that. 

The long way back
Investors were letting go of Best Buy long before Tuesday's soft open. The stock was trading 20% lower in 2014, even as the major market indices crawl toward fresh highs.

Waiting for the turnaround has grown stale, and even Best Buy executives seem to have gone into rerun ode. 

"We are also seeing ongoing softness in the mobile phone category ahead of highly anticipated new product launches," CFO Sharon McCollam states in Tuesday morning's earnings release. If that sounds familiar, it should.

"We are also expecting ongoing softness in the mobile phone category as consumers eagerly await highly anticipated new product launches," went her statement in the prior quarter's earnings release. 

We get it. The iPhone is going to save Best Buy -- even if it didn't do that last year (or the year before). Let's try and find new ways to tiptoe around that next time, shall we, especially after warning of negative comps through the next two quarters when the iPhone 6 will undoubtably be on the market. 

Joly has served Best Buy investors well, and investors that have held on since the beginning of 2013 are still sitting on a huge gain. However, for a turnaround to start we need to hit bottom. We're still not there from a sales perspective, and if we don't get there soon even Joly is going to be hard pressed to find ways to improve the bottom line. 

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  • Report this Comment On August 26, 2014, at 3:58 PM, pondee619 wrote:

    "Best Buy executives seem to have gone into rerun ode." They wax poetic?

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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