Best Buy Sets Long-term Targets, Aims for Stable Sales

Tuesday, 13 Nov 2012 05:22 PM

 

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Best Buy Co. wants to triple its operating margins over time, the company said on Tuesday, as its new chief executive unveiled plans to turn around the world's largest consumer electronics chain.

The aggressive new target comes as Best Buy faces cutthroat competition from online and discount retailers like Wal-Mart Stores Inc and Amazon.com Inc.

But CEO Hubert Joly got a difficult reception from investors, who questioned whether management was overly focused on trying to wring higher sales out of existing customers rather than attracting new ones. Joly was named CEO on Aug. 20.

Shares closed nearly 1 percent lower at $15.70 on Tuesday, continuing a slide that has knocked off a third of the company's market capitalization this year. The shares touched a 10-year low last week.

Dimitri van Toren, senior portfolio manager at Dutch asset manager Syntrus Achmea, which holds about 2 million Best Buy shares, said he was worried about structural issues and a "management vacuum" at the retailer, but that he would stay in the stock despite concerns about the upcoming holiday season.

In a statement on Tuesday, the company said its short-term goal will be "to stabilize and then begin increasing its comparable store sales and operating margin." Over time, it is aiming for a return on invested capital of 13 to 15 percent, in addition to a 5 to 6 percent operating margin target.

In the last fiscal year, Best Buy had an operating margin of about 2.1 percent. The last time that margin exceeded 5 percent was in the fiscal year that ended in early 2008.

Joly said a mixture of excessive costs and price competition hurt margins, and that the retailer would turn to a wider variety of higher-margin, private-label products to boost results. One example is the company's own Insignia-brand electronics.

Best Buy has been struggling to combat a phenomenon known as "showrooming," where people visit its stores to look at products and then buy them online for less.

Joly acknowledged the company has suffered from a "price perception issue" among customers that it needed to address, as well as weakness in its online operations. The head of the company's digital business said its online conversion rate - which measures how successfully Best Buy translates customer visits into actual sales - was only about half of what it should be.

"Many of these problems are a result of our own making," Joly said at an "investor day" event on Tuesday.

 

HOLIDAYS COMING

Best Buy also said on Tuesday that it would pursue a plan to "optimize its store footprint on an ongoing basis," which suggested the company may look at ways to shrink or close stores, as some other big-box retailers have done. In late March the company said it would close 50 large U.S. stores.

Joly warned that merely closing stores would not boost operating income, as most of the big-box stores are already profitable. Relocation to smaller space may be an option, however; he said 71 percent of the large-format stores have leases expiring within the next six years.

The details of Joly's long-awaited plan came roughly a week before the unofficial start of the year's biggest selling season.

The investor day meeting gave him a chance to woo investors and to distance the company from Richard Schulze - its founder, former CEO and largest shareholder - who is trying to take it private.

Joly has already made some structural changes. He eliminated the top layer of management at Best Buy's U.S. operations, and earlier this week named former Williams-Sonoma finance chief Sharon McCollam as the new CFO, hoping to tap her experience in developing a higher-margin e-commerce business and cutting costs by reducing square footage.

The retailer, which has posted declines in same-store sales in eight of the last nine quarters, warned last month it expected earnings and same-store sales to fall again in the third quarter.

"I am already sick and tired of negative comps," Joly said, referring to same-store sales figures.

The CEO also admitted a number of past investments have not paid off and promised the new leadership would be "prudent" about that in the future, a nod to ongoing Wall Street concerns about spending by past management.

© 2014 Thomson/Reuters. All rights reserved.

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