22 Aug 2012

What should Best Buy do to survive?

Raj Bhatt

Best Buy just announced a bad Q2 (click here). Same store sales are down in the US and significantly down internationally. Their operating income has shrunk 87% on falling margins and rising SG&A. Their services, mobile and tablets sales are the only bright spots in a fairly sad story on declining TV, gaming and computer sales. Even the shutting down of stores does not seem to have enabled them to stem the tide.

Here are excerpts from their earnings release:

FISCAL SECOND QUARTER PERFORMANCE SUMMARY

(U.S. dollars and square footage in millions, except per share and per square foot amounts)





Three Months Ended


Aug. 4, 2012
July 30, 2011
Change






Revenue $10,547
$10,856
(3%)
Comparable store sales % change1 (3.2%)
(3.8%)
60bps
Gross profit as % of revenue 24.3%
25.4%
(110bps)
SG&A as % of revenue 23.1%
23.0%
10bps
Restructuring charges $91
$0
N/A
Operating income $33
$260
(87%)
Operating income as a % of revenue 0.3%
2.4%
(210bps)
Diluted EPS from continuing operations $0.04
$0.39
(90%)






Adjusted (non-GAAP) Results2




Operating income $124
$260
(52%)
Operating income as a % of revenue 1.2%
2.4%
(120bps)
Diluted EPS from continuing operations $0.20
$0.39
(49%)






Key Metrics3




Total U.S. big box retail square feet              41.0
                42.6
(4%)
Revenue per square foot (Domestic segment) $857
$846
1%
Adjusted operating income per square foot (Domestic segment) $41
$45
(9%)
Adjusted return on invested capital4 11.1%
10.7%
40bps
Fiscal Second Quarter 2013 Highlights
  • Domestic comp store sales decline of 1.6 percent improved compared to fiscal first quarter decline of 3.7 percent 
  • Domestic estimated market share maintained year-over-year 
  • U.S. big box square footage reduced by 4 percent year-over-year; Domestic revenue per square foot up 1 percent year-over-year 
  • Similar to the first quarter of fiscal 2013, International segment year-over-year operating income decline driven primarily by lower revenue in China, Canada and increased competitive conditions in Europe 
  • Domestic segment total Services category revenue increased approximately 6 percent 
  • Momentum grows in Domestic services with key partnerships announced recently: AARP, Verizon and Target  
  • Domestic segment online revenue growth of 14 percent 
  • Domestic segment connections growth of 11 percent 
  • Domestic segment mobile phones comparable store sales growth of 35 percent 
  • Domestic segment comparable store sales growth in tablets, mobile phones, appliances and eReaders more than offset by declines in gaming, digital imaging, televisions and notebooks 
  • Adjusted (non-GAAP) Domestic segment year-over-year operating income decline driven primarily by lower gross margins in computing, mobile phones and televisions 
Best Buy today announced GAAP net earnings from continuing operations were $12 million, or $0.04 per diluted share, for the three months ended August 4, 2012 compared to net earnings from continuing operations of $150 million, or $0.39 per diluted share for the prior-year period. 
Revenue



Three Months ended Aug. 4, 2012
Prior-Year Period
($millions) Revenue
Change YOY
Comp. Store Sales
Comp. Store Sales
Domestic $7,803
(2.2%)
(1.6%)
(4.1%)
International 2,744
(4.7%)
(8.2%)
(2.8%)
Total $10,547
(2.8%)
(3.2%)
(3.8%)
The Domestic segment comparable store sales decline of 1.6 percent was driven by declines in gaming within the Entertainment revenue category, digital imaging and televisions within the Consumer Electronics revenue category and notebooks within the Computing and Mobile Phones revenue category. These declines were partially offset by comparable store sales growth in tablets and mobile phones within the Computing & Mobile Phones revenue category, the Appliances revenue category, and eReaders within the Consumer Electronics revenue category. The Domestic segment online channel revenue grew 14 percent compared to the prior-year period.
The International segment comparable store sales decline of 8.2 percent was driven by the lower growth in consumer spending in China and the continued impact from the expiration of government sponsored programs, which negatively impacted sales in Five Star. Market softness in notebooks, digital imaging and home theater in Canada also contributed to the International comparable store sales decline.
Gross Profit



Three Months ended Aug. 4, 2012
($millions) Gross Profit
Change YOY
% of Revenue
Domestic $1,896
(6%)
24.3%
International 668
(9%)
24.3%
Total $2,564
(7%)
24.3%






Domestic segment gross profit decreased 6 percent, reflecting a rate decline of 110 basis points compared to the prior-year period. The Domestic segment rate decline was primarily due to three factors. In mobile phones, connection growth and a mix into higher price point smart phones resulted in strong comp sales and gross profit dollar growth, although at a lower overall rate. Second, industry softness in computing resulted in increased promotional activity in the quarter to stimulate consumer demand ahead of the second half of fiscal 2013, which will include the Windows 8 launch. Finally, there was less favorable product mix within the television category.
International segment gross profit declined 9 percent, reflecting a rate decline of 130 basis points compared to the prior-year period. This rate decline was driven by Best Buy Europe and due primarily to increased mix of lower margin wholesale sales and promotional activity within a price competitive environment for mobile phones.

Operating Income



Three Months ended Aug. 4, 2012
($millions) Operating Income
Change YOY
% of Revenue
Domestic $83
(65%)
1.1%
International (50)
n/a
(1.8%)
Total $33
(87%)
0.3%






What should they do to survive the onslaught of online retail (and the show-rooming effect) and of discount retailers?

I think the following measures would make sense:

  • Continue to aggressively expand the services business by extending tie-ups to a wider range of partners (much like their VZ, TGT and AARP alliances). Become the preferred service partner for as many telecom and cable companies, and computer/ TV manufacturers as possible so that customers look to Geek Squad irrespective of the brand of device or service being consumed.
  • Improve online buying experience. Bestbuy.com does not have a good recommendation engine (“People who bought this product also bought Y”, “People who viewed this product bought X”), unlike Amazon.  Also BestBuy.com should clearly state its free shipping policy and clearly highlight the value of the store pick-up option.
  • Continue to close down unprofitable stores
  • Focus more on small kiosks at airports (mp3 players, DVDs, headsets) and on smaller store formats — these locations have lower SG&A

Let me know what you think!

Best Buy, Geek Squad, online, recommendation engine, services, showrooming

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