Wednesday, February 5, 2014

Best Buy Trying to Turn Around - Analyst Blog

As per media reports, electronic giant retailer Super Sale Co., Inc. ( BBY ) is likely to slash 950 employees from its Canadian operations (Best Buy and Future Shop outlets) to cut down on costs.

Further, Best Buy is remodeling its outlets in Quebec, British Columbia, Manitoba, Ontario and Alberta with "Stores-within-a-Store" idea by collaborating with vendor partners including South Korean giant Samsung and Microsoft Corporation ( MSFT ).

These moves are a part of Best Buy Canada's efforts to streamline its operations and lay more emphasis on developing its online sales. This announcement comes nearly a year after Best Buy Canada declared its decision to shut down 15 outlets and layoff 900 employees.

Earlier in Jan 2014, Best Buy's stock had crashed 30% in a single day following dismal holiday sales data and the subsequent trimming of guidance, raising concerns over CEO Hubert Joly's ambitious restructuring strategy.

Best Buy's sales fell 2.6% year over year to $11,451 million for the nine weeks ended Jan 4, 2014, while comparable store sales (comps) dipped 0.8% over the same time frame.

Best Buy held that intense promotional war, which characterized the holiday season, had significantly impacted its margins and thus compelled a downward revision in its operating margin guidance. The company had cut down prices, at the expense of profits, to compete better with peers such as Wal-Mart Stores Inc. ( WMT ).

The only silver lining was Best Buy's strong online performance amid heightened competition from online giants like Inc. ( AMZN ). Online sales at the domestic segment rose 23.5% versus 10% in the prior-year period (nine weeks ended Jan 5, 2013).

The rise of e-commerce could become a potentially catastrophic event for bricks-and-mortar retailers. Amazon has metamorphosed the way consumers used to shop, and the company's performance over this holiday season bears a testimony to it.

E-retailers have the biggest advantage of not maintaining any stores and as a result command a better pricing technique without denting margins. Bricks-and-mortar retailers falter on this ground as prices can be lowered only at the expense of margins as seen this holiday season.

We believe that Best Buy's strategy is on the right track. However, it has failed to produce desired results as reflected in the dismal holiday sales. Hence, it is not easy to comprehend Best Buy's situation at present until we get a clear picture.

Best Buy currently carries a Zacks Rank #5 (Strong Sell).

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