Source: Mike Mozart on Flickr

Consumer-electronics retailer Best Buy (NYSE:BBY) blew past analyst estimates for earnings when it reported its first-quarter results, overshadowing a decline in comparable-store sales and sending the stock higher. CEO Hubert Joly's Renew Blue strategy, which targets $1 billion in annualized cost savings, is making exceptional progress, with $860 million in savings realized so far. While declining revenue is a concern, Best Buy is actually gaining market share from rivals like RadioShack (NYSE: RSH) and hhgregg (NYSE:HGGGQ), and it's evident that the turnaround remains on track.

Best Buy is winning market share
While Best Buy saw its domestic comparable-store sales decline by 1.3% during its fiscal first quarter, which ended on May 3, NPD expects the consumer- electronics industry to decline by 2.6% during the second calendar quarter of this year. What this means, as pointed out by Joly during the company's conference call, is that Best Buy gained market share during the quarter.

There were two main drivers behind this market share gain. First, Best Buy has been getting more competitive on price, and the ongoing cost cuts have been financing these efforts. The gross margin declined by 0.7 percentage points year over year during the first quarter, partly due to pricing investments. The good news is that the Renew Blue cost savings more than offset this decline, with the operating margin increasing year over year.

Second, online sales have been exploding. During the first quarter, online sales increased by 29.2% year over year compared to 16.3% growth in the first quarter last year and 25.8% growth in the previous quarter. This growth has been fueled by Best Buy's increased focus on e-commerce, and the first quarter was the first full quarter that the ship-from-store program was active in all of the retailer's 1,400 stores. Ship from store allows online orders to be fulfilled directly from Best Buy locations, increasing online availability and cutting down on shipping times.

Best Buy's performance needs to be viewed relative to the consumer-electronics industry as a whole. Industrywide weakness appears to be the main culprit behind Best Buy's falling sales, with few new products able to stoke consumer demand. This is a very different story than what is emerging at some of Best Buy's competitors, and trouble for the competition is good news for Best Buy.

Smaller competitors are falling apart
While Best Buy is the only large nationwide consumer-electronics retailer left standing, smaller competitors like RadioShack and hhgregg are still in the mix. With Best Buy gaining market share, it's likely that these smaller players are losing it.

RadioShack reported a devastating 19% decline in comparable-stores sales during its most recent quarter; and with a plan to close 1,100 stores scrapped due to issues with creditors, RadioShack is at serious risk of bankruptcy in the near future. The company's turnaround strategy is similar to Best Buy's, becoming a showroom of sorts for the latest tech products, but RadioShack's small store size and largely irrelevant brand put it at a severe disadvantage to Best Buy. RadioShack operates around 5,000 stores in the United States, and Best Buy stands to gain from a smaller, or possibly non-existent, RadioShack.

hhgregg, a company which operates 228 stores, has also been struggling. In its most recent quarter, hhgregg reported a 9.9% decline in comparable-store sales, and a net profit in the same quarter last year turned into a net loss this year. Consumer electronics, which made up 38% of total sales in the quarter, suffered from a massive 18.9% comparable-store sales decline, with growth in appliances and home products unable to make up for it.

With no must-buy product category in the consumer-electronics market, turning a profit selling TVs, PCs, and smartphones has become more difficult. The most efficient retailer will ultimately survive; and looking at the cost structures of Best Buy, RadioShack, and hhgregg, it's clear which company has the advantage:


Operating expense as a % of revenue in the most recent quarter, excluding one-time items

Best Buy






The bottom line
Best Buy managed to gain market share during a difficult time for the consumer- electronics industry, and its aggressive cost cutting is paying off as competitors struggle to turn a profit. Best Buy's scale gives it the ability to be more efficient than smaller competitors; and in an industry with low margins, scale means everything.