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If there were ever any questions about the importance of focusing on the customer, they were answered in Best Buy's (BBY, news, msgs) fourth-quarter earnings report.
The nation's top electronics retailer blew away its competition despite an increasingly tough economy. Its earnings soared 20% on a 21% jump in sales, and same-store sales were up by an impressive 5.9%, beating both the company's and Wall Street's expectations. Clearly, Best Buy's focus on customer satisfaction, combined with its aggressive pricing strategy, worked.
Who was the big loser? Chief rival Circuit City Stores (CC, news, msgs), which announced a quarterly loss of 7 cents a share despite a 1.2% sales gain. Sales at stores open at least a year fell by 0.5% compared with very strong results a year ago. With Circuit City replacing many of its sales associates with less expensive hourly workers in what looks to be yet another ill-fated restructuring, the gap between these two electronic retailers should widen.
Constantly improving customer service
Best Buy succeeds where others fail because of management's current commitment to constantly improving the customer experience. A few years back Best Buy suffered from a reputation of poor service, as its stores were understaffed and the staff undertrained. But management listened and adopted a core strategy dubbed "customer centricity."By redesigning its stores into more easily defined segments (home theater, wireless, computer, appliances, etc.) and staffing those specialty areas with better-trained employees, Best Buy has separated itself from the competition in much the way Lowe's (LOW, news, msgs) has pulled away from Home Depot (HD, news, msgs). With Chief Executive Brad Anderson acknowledging that the company will continue to "think about ourselves in new ways as we differentiate more from the competition," there's no doubt that Best Buy will continue to be the best investment in its space.
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Best Buy also posted an impressive 9.2% same-store sales gain in its entertainment software product group, which accounts for 21% of total sales. Gains in gaming hardware and video gaming software -- thanks to the release of new Sony (SNE, news, msgs) PlayStation and Nintendo (NTDOY, news, msgs) systems -- helped offset continued weakness in DVD and CD sales. With video gaming systems in the early adoption phase, expect sales from this area to remain strong for several quarters to come.
Weaker areas promise growth
On the other hand, weak desktop computer and printer sales weighed on the company's home office unit, while ongoing weakness in the housing sector hurt the appliance division. Still, both posted fractional same-store sales gains, and with the recent unveiling of Microsoft's (MSFT, news, msgs) Windows Vista operating system, and a modest rebound in housing projected for later this year, both units should see improvement. (Microsoft is the publisher of MSN Money.)Another growth area is international markets. Revenue in Best Buy's international segment rose 43% from a year ago to $1.8 billion. Management credited the acquisition of Five Star retail stores in China, strong same-store sales in Canada, new store openings and an extra week of revenue. While the Five Star acquisition cut into margins, the bigger story was Best Buy's success in translating its business model in other countries. The company is off to a good start in China, which has plenty of growth potential, and the international segment overall will play an increasingly important role in driving future growth.
If there was a point of concern in Best Buy's numbers it was the drop in gross margins to 23.7% from 24.6%. Discounting, a shift in the sales mix toward lower margin products and the acquisition of Five Star was the culprit. Tight expense controls will largely offset future declines, but management forecast gross margins will slip by another 0.3-0.4 percentage point in fiscal 2008. While investors will want to monitor the trend in margins to make sure that erosion doesn't accelerate, there's nothing at this point to get too concerned about.
Best Buy continues to impress with its ability to adapt to the market and build on its already strong customer relationship. With the stock trading at the lower end of its 52-week range and at only 15.5 times estimated fiscal 2008 earnings, Best Buy is just that for investors -- the best buy in retail at the moment.
Toss in excellent management and the fact that the company is sitting on nearly $5 per share in cash (which makes the multiples even that much more attractive), and you have a big-time bargain with upside to the $62 area over the next 12 months.
At the time of publication, Robert Walberg did not own or control shares of any company mentioned in this article.
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