Driving down the cost of goods sold
Joly believes that the company can reduce the cost of goods sold by $325 million, and to date has already delivered $30 million of those savings. The company has worked to optimize its inventory replenishment system, resulting in a reduction of loads and miles driven for its trucks. This process is only half complete, and the remaining work will be done in the second half of the year.
An area where big savings can be found is in reverse logistics, i.e. returns, replacements, and damaged goods. The company estimates that this area is responsible for about $400 million in losses annually, representing a big opportunity for cost savings. Dedicated clearance zones and the buy online, ship from store initiative should help reduce those losses, especially considering that clearance items at the store level can be bought online.
Optimizing the real estate portfolio
One of Best Buy Co., Inc. (NYSE:BBY)’s largest expenses is rent on its properties, and the company has been gradually working to realize savings in this area. During the first quarter rent was renegotiated for some stores and one large-format store was closed. In addition, Best Buy Co., Inc. (NYSE:BBY) is opening more small-format mobile stores even as large-format stores are being shuttered. Ten of these mobile stores were opened in the first quarter, and the company plans to open two more later this year.
SG&A cost reduction
Best Buy Co., Inc. (NYSE:BBY) believes that about $400 million in cost savings in Selling, General, & Administrative (SG&A) expenses can be achieved in the domestic market, and so far the company has found $295 million in savings, nearly 75% of the total in a very short amount of time. These costs cuts includes things like cutting 400 jobs at its headquarters in February, removing layers of management in an attempt to make the company more efficient. It’s likely that the remainder of the cost savings will be realized more gradually.
The financial picture
Because last year’s first quarter contained sales relating to the Super Bowl while this year’s results did not, comparing numbers directly is a bit dubious. It’s safe to say, however, that profits have declined. The exact amount is questionable, but price cuts and aggressive investments have certainly lowered profitability.
However, Best Buy was still plenty profitable during the quarter. Instead of looking at net income or free cash flow I like to look at owner earnings to gauge true profitability. Owner earnings for the quarter were roughly $210 million, or $0.61 per share. This is down sharply from last year, but it paints a much rosier picture than the non-GAAP EPS or the free cash flow would have you believe. Owner earnings in the last fiscal year, which I calculated here, came out to $4.14 per share. It’s likely that owner earnings will be lower this year, but even simply annualizing the first quarter results to $2.44 per share leaves the company trading at a little over ten times owner earnings. And this doesn’t include the effect of the much more profitable holiday season to come.
The balance sheet still looks fine. The company has $908 million in cash, but the sale of Best Buy Co., Inc. (NYSE:BBY) Europe should bolster this a bit. This compares to $1.68 billion in debt, $544 million of which is due within the next year. The company continues to pay a dividend, with a $0.17 per share payment announced a day after the report. There was speculation last year that the company would have to suspend its dividend, but its financial situation turned out to be stronger than those people assumed. The dividend currently yields 2.65%.
Why Best Buy has an advantage
If a customer looking to buy any kind of electronic device wants any chance of decent customer service, Best Buy is often the only game in town. It’s the only nationwide consumer electronics chain left, although it competes with the likes of Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). Even with all the criticism about Best Buy employees, they’re experts compared to employees at Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). One of Best Buy’s big initiatives is to improve the customer experience, and that includes increased employee training.
Those who criticize Best Buy are often far more knowledgeable about technology than the average consumer. But many people don’t know the first thing about Android, iPhones, or Windows Phones and desire someone to explain it to them. The Samsung Experience Shops are a great idea because it provides just that. Many people don’t know anything about setting up a home network or a home entertainment system, and Best Buy offers a solution to those people.
When Wal-Mart Stores, Inc. (NYSE:WMT) reported earnings earlier this month same store sales in the U.S. were down 1.4% year-over year. Target reported a same-store sales decline of 0.6%. So did Best Buy really do that badly, with a 1.1% decline in same-store sales which, as Joly said in the earnings call, would have been flat excluding the impact of the Super Bowl moving to the fourth quarter and other special circumstances?
The bottom line
Best Buy Co., Inc. (NYSE:BBY) is taking all the right steps, reducing costs and becoming more price competitive. Those who look at the financial results for more than 5 seconds can see that the quarter was profitable for Best Buy excluding the effects of write-offs and non-cash charges. Best Buy is engaged in a profitable turnaround, something that can’t be said for many other struggling retailers like RadioShack and J.C. Penney Company, Inc. (NYSE:JCP). Expect big things from Best Buy in the coming years.
The article The Turnaround Continues: Part II originally appeared on Fool.com and is written by Timothy Green.
Timothy Green owns shares of Best Buy. The Motley Fool has no position in any of the stocks mentioned. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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