Best Buy (BBY, Financial) has definitely seen better days.
No one can deny the business has been shrewdly managed, and CEO Hubert Joly has been working overtime in order to shed dead weight and create sustainable growth. But evolving consumer buying habits are wreaking havoc on the company’s bottom line. In order to stay relevant, Best Buy is going to have to sort itself out – and fast.
Unfortunately, the picture shareholders were given this week does not illustrate a company that’s turning things around.
Best Buy published its Q4 results on Thursday, wrapping up a tough fiscal year that was defined by unsustainably low product prices and declining sales across the board. The company posted quarterly revenues of $13.62 billion, equating to an EPS of $1.53. That figure represents a 4.1% decline year over year. Elsewhere, operating income remained stagnant and adjusted operating profit fell by a point.
The last 12 months definitely haven’t been kind to Best Buy. Yet the company isn’t in mortal danger just yet. After all, Thursday’s report wasn’t all doom and gloom. Adjusted profit actually grew by 2.6% year over year, and Best Buy’s gross margin expanded to 21.6% last quarter. Meanwhile, the company’s ecommerce business grew by nearly 14%, accounting for one-sixth of all revenues.
That’s great news – but if Best Buy wants to keep up with competitors like Amazon (AMZN, Financial), online sales are going to need to increase by a heck of a lot more in the months to come. Why? Because in-store sales can no longer prop up the company.
Best Buy’s international sales are in a particularly sorry state. Thanks to raw exchange rates and a set of frantic store closures across Canada, international revenue has declined by 26.2%, finishing the year at just over $1 billion. That being said, gross profit rates held steady at 21.8% on a non-GAAP basis – thanks largely in part to calculated marketing moves down in Mexico. Yet by and large, Best Buy’s international operations are definitely on the decline.
That would be OK if U.S. sales were doing well; however, that just isn’t the case.
Best Buy’s domestic revenue actually dropped 1.5% last quarter to $12.5 billion. The primary culprit of that decline was a comparable sales drop of nearly 2%. Tablets, digital cameras and mobile phones simply are not selling in store, and it’s hurting the company’s bottom line. In some cases, decisions have already been made to try and cut those losses out of the bigger picture for FY2017. The company shut down 30 Best Buy Mobile stores last year, which negatively affected its Q4 results. Yet in the long term, it’s these sorts of decisions that will ultimately safeguard Best Buy’s future.
The key takeaway from Thursday’s quarterly results should be Best Buy’s rapidly improving ecommerce business. Domestic online revenue shot up by 13.7% last quarter, hitting just shy of $2 billion. That’s pretty impressive – and if Best Buy could maintain this sort of growth across the next fiscal year, there’s some room for encouragement.
The future of retail is undeniably online. Fewer and fewer consumers are relying on gung-ho sales staff in order to make educated buying decisions, and mobile conversions are up across the board. The industry is driven by convenience. Thankfully, it looks like Joly and his team have finally figured that out.
This quarter, Best Buy will be entering the next phase of its so-called Renew Blue strategy. What’s Renew Blue? It’s essentially a relentless restructuring of the company’s business activities. A lot of it centers on slashing costs in order to make retail stores more sustainable.
Yet the primary goal of this new strategy is to improve and expand Best Buy’s multichannel capabilities. Consumers want a more dynamic shopping experience, and that experience starts online. In the long run, that’s inevitably where Best Buy is headed.
But if you're only interested in the short term, Best Buy may not be the smartest buy. The company has already issued a pessimistic outlook for FY2017. Revenue is expected to decline this quarter by at least 2.4%, while international sales will continue to shrivel up and die.
At the end of the day, the name of the game is survival. This is probably going to be another mediocre year for the company – but if Best Buy can keep its eye on the ball and build wisely upon its digital momentum, there’s still plenty of hope for the future.
