Best Buy (BBY) is getting whacked after releasing details from its Investor Day which starts at 1:00 PM today. Let's delve into the details...
When Best Buy unveiled its Renew Blue transformation strategy in November 2012, the company faced two fundamental problems: negative comparable sales and declining operating income rate.
The strategy worked. Comparable sales and operating income rate are up, non-GAAP earnings per share have grown at a compound annual growth rate of 8 percent and total shareholder return over the last five years was 263 percent, ranking in the top 10 percent of S&P 500 companies. Importantly, the company proved it was possible to win with a combination of competitive prices and a higher level of service.
Looking ahead, the company believes it is operating in an opportunity-rich environment, driven by innovation and customers' need for help. Best Buy 2020 is designed to take advantage of key growth opportunities by expanding what the company sells and evolving how it sells. Examples of how Best Buy intends to expand what it sells include:
- Building a leading position in the smart home market, by continuing to expand its curated assortment, demonstrating new technology solutions in a meaningful way, and entering the solutions and services part of the market. By the end of October, the company will enhance the smart home areas in all of its stores; roll out its Best Buy Smart Home Powered by Vivint home automation and security offering to 450 stores; and add 1,500 dedicated smart home employees.
- Piloting a service, Assured Living, that uses technology to help adult children remotely check in on the health and safety of their aging parents. Now available in two markets, this pilot aims to create peace of mind for the children while allowing the parents to live and thrive independently.
- Launching Total Tech Support, a new Geek Squad offering that provides ongoing support for a customer's tech, no matter where or when they bought it. This offering is available nationwide in Canada and at 200 stores in 10 U.S. cities.
Meanwhile, Best Buy is evolving how it sells to focus not on just selling products but solving customers' underlying needs. The company will seek to accelerate its growth by continuing to improve the customer experience within and across channels, more effectively addressing customer needs in underpenetrated categories and building its in-home channel.
To that end, Best Buy recently expanded its In-Home Advisor program to all major U.S. markets. It now has 300 advisors who are specially trained to provide free in-home consultations to help customers find the right technology solutions for their unique needs.
To support the Best Buy 2020 strategy, the company plans to make key investments in technology and people. It is committed to continuing to create efficiencies that help fund these investments and offset potential pressures. Best Buy delivered $1.4 billion in cost savings over the last five years. And, as previously announced, it plans to drive an incremental $600 million in annualized cost savings by the end of fiscal 2021. As discussed earlier this year in March, with Best Buy 2020, the company aspires to solve the following financial equation: gradually increase its rate of topline growth, create efficiencies to help fund investments and offset potential pressures, and build more predictable revenue streams from recurring revenues and stickier customer relationships.
Today Best Buy is setting new long-term financial targets for fiscal 2021:
- Enterprise revenue of $43 billion versus $39.4 billion in fiscal 2017, which was the last year of the company's Renew Blue transformation
- Non-GAAP operating income of $1.9 billion to $2.0 billion versus $1.7 billion in fiscal 2017 and non-GAAP diluted EPS of $4.75 to $5.00, which represents an 8 to 9% compound annual growth rate from fiscal 2017
The fiscal 2021 targets are appear to be pretty strong, with EPS in-line with the sell-side consensus and revenue above. CEO Hubert Joly has done an incredible job during his tenure at Best Buy and the company must continue to differentiate from ordinary retailers by offering value-added services. Same store sales growth is excepted to accelerate above 3% this year after sub-1% growth three years in row. Still, Best Buy is dependent on technology product cycles. The smart phone super-cycle will create tough comparisons for next year. It is clearly a better business than apparel retail, but investors don't seem to envision tons of upside in the stock in a retail environment where we see once-ionic brands fall by the wayside (Toys-R-Us being the latest example).
Despite growing market share thus far, customer traffic will remain a concern for investors. The stock sold off on fears about the future despite strong second quarter results last month and now we are seeing investors once again seemingly price in the prospect for deteriorating fundamentals down the road.