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What the Road Ahead Looks Like for Best Buy

By Andrew Marder – Feb 28, 2014 at 10:17AM

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Best Buy shocked the market with a better-than-expected bottom line, but the honeymoon ended quickly because of the company's lackluster revenues.

Last quarter's earnings release from Best Buy (BBY 0.15%) hit the market like neon spandex pants -- super-exciting for minute, then we all got over it. The stock jumped as much as 8% in early trading yesterday, but dwindled throughout the day, ending up dropping 1% by the afternoon. That early excitement was predicated on the company's surprising income line over the quarter.

Best Buy isn't increasing its comparable sales, but the fall was relatively small this time out. Is that enough for investors to get excited about the business? More important, do the small successes mean there's good news in store for Best Buy, or is the road all downhill from here?

Best Buy's fourth quarter
Comparable sales fell 1.2% in the fourth quarter, which was a smaller fall than the business saw in the fourth quarter last year. On the downside, domestic comparable sales were negative this year, while in 2012, fourth-quarter domestic comparable sales grew slightly. 

Investors were most excited about the earnings of $1.24 per share, when analysts were only expecting $1.01. Bottom-line results were most clearly affected by the company's cost-cutting measures. Best Buy said it had eliminated $765 million in annual North American costs and believes it can get that total to $1 billion. 

The Best Buy of tomorrow
The company is now focusing in on its online opportunity. Best Buy's management has come to terms with the fact that customers shop online before they come into the store. Gone are the days of long-winded explanations of features, leading to an eventual sale. Now shoppers just want to see the product, know that they're getting a good price, and leave with the very specific item they had in mind.

To meet those customers on their terms, Best Buy has to be better online. In stores, questions can be answered if they come up, and products can be displayed in the best metaphorical light. As CEO Hubert Joly said on yesterday's call, "[There's] no blue shirt on the site, so you have to expand the shoppability of the site." 

To that end, Best Buy is investing in online to help push up its strongest sales channel. Online sales grew 19.8% last year over 2012, far and away the best result the company managed. More and more, those customers are buying online and picking up in-store, giving Best Buy all sorts of opportunities to increase sales -- but it has to start online.

Over the remainder of 2014, Best Buy needs to get its site running as smoothly as possible -- and start to connect that online experience to the in-store, "Blue Shirt" experience that it prides itself on. If Best Buy wants to grow and live to see 2020, then it needs to give shoppers a reason to walk through the door. Management has finally realized that that means connecting with customers on their terms, not Best Buy's.

Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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