Best Buy CEO declares turnaround phase over, but there are still challenges

Four years after ushering in his "Renew Blue" strategy to resuscitate Best Buy, CEO Hubert Joly proclaimed Wednesday the retailer's turnaround phase was officially over.

Joly acknowledged Best Buy still has plenty to do, especially after it just reported a drop in holiday sales and a forecast for flat growth and profitability this year. The results disappointed investors. The retailer's shares dropped 4.5 percent on Wednesday.

But he noted that the retailer just finished its third straight year of comparable sales growth — albeit tepid growth of less than 1 percent a year — and has become profitable again even while matching prices with competitors such as Amazon.com.

"I don't know about declaring victory, but this is meaningful improvement," he told reporters. "Four years ago, it was about saving the company. We didn't die: check."

Under Joly's leadership, the company has slashed more than $1 billion in costs. It has invited major vendors such as Samsung and Sony to set up mini-shops inside its stores. And it has improved its digital capabilities, with online sales accounting for about 19 percent of its U.S. sales during the holidays.

Joly dubbed the next phase "Best Buy 2020: Building the New Blue."

"It's about shaping our future, … moving from a turnaround mode to more of a strategic mode," he said. "It's still going to be a journey."

The next chapter still will include finding ways to take out costs to fund new initiatives. It will also focus on finding more predictable revenue streams to help Best Buy rise above the ups and downs of cyclical electronics markets.

In particular, it will focus on getting the most bang it can out of its online business, expanding services such as its Geek Squad and in-home advisers pilot program and looking for growth in its Canadian and Mexican operations.

Neil Saunders, managing director of GlobalData Retail, agreed that Best Buy has stabilized over the last several years, but said it still seems to be in a "turnaround of sorts."

"I don't think they're in the same phase they were some years ago when they were struggling and searching for a reason to exist," he said. "They've definitely exited that more challenging phase, but there's still more work to do."

They're in a challenging market, he added, with electronics sales down industrywide, but noted that some players like Apple and Amazon seem to be better positioned. "I don't think anyone would expect Best Buy to have a big growth spurt, but it's disappointing to hear things will be flat" this year, he said.

For the coming year, Best Buy forecast flat revenue and operating income on a 52-week basis on the assumption the company will continue to gain market share while the overall electronics industry will remain negative as it has been the last two years.

Still, David Magee, an analyst with SunTrust Robinson Humphrey, said in a research report that he expects the guidance for the full year may rise. Best Buy "seems to be one of the few retailers showing sustained success with a meaningful omnichannel approach," he wrote. "We believe that [Best Buy] is executing well and gaining share in most categories," he said.

In the first quarter, Best Buy executives said pressures from a shortage of various in-demand products that started during the holidays are expected to continue through the first months of this year. That weighed down its forecast, which now calls for a 1.5 to 2.5 percent drop in comparable sales in the current quarter.

Joly told reporters that a number of products that included the Apple Watch 2, Amazon Echo, Google Pixel and the Nintendo NES Classic were in short supply during the holidays. "It's not unusual to have some product availability issues during the holidays," he said. "But this was unprecedented."

While it's difficult to quantify the missed sales opportunities, he said Best Buy has estimated it to be about $200 million — the same amount of lost sales the company also projected in the fourth quarter as a result of the recall last fall of the Samsung Galaxy Note 7.

If not for the smartphone recall, Best Buy said it would have recorded positive sales for the fourth quarter.

The retailer logged a 0.9 drop in comparable U.S. sales in the November-to-January period, which was the low end of its guidance for sales to be up or down 1 percent. Overall revenue was also down slightly to $13.48 billion, lower than the $13.62 billion analysts expected.

Best Buy said sales of connected home products, computers, headphones and TVs helped offset declines in gaming, tablets, and mobile phones. Online sales rose 17.5 percent. Profits rose 27 percent to $607 million, up from $479 million. Adjusted for one-time issues, the company reported earnings per share of $1.95, which was higher than the $1.67 analysts were expecting.

Best Buy also announced Wednesday a 21 percent increase to its dividend and an accelerated share repurchase program to $3 billion over two years, up from $1 billion. The stock closed Wednesday at $42.14, down $1.99.

Executives said a drag on the business has been the delayed tax refunds that didn't show up for many consumers in time to hit the Presidents' Day weekend sales.

But one thing that could help Best Buy is the recent woes of hhgregg, a regional retailer that sells appliances, electronics and furniture. The 200-store chain is reportedly close to filing bankruptcy.

While Joly didn't mention the competitor by name, he said that if the chain does end up closing stores, it would likely lead to a $1 billion appliance business up for grabs among many players, including Best Buy. "It's not something transformative for us," he told analysts.

But it would be another case of another company being a "generous share donor" to Best Buy, he said.

Kavita Kumar • 612-673-4113