Retail stock Best Buy (NYSE:BBY) made its biggest admission yet of its failure to remain relevant in the consumer technology business. Best Buy announced the closure of 50 stores and plans to open 100 smaller ones, amid mixed earnings results that might signal BBY is turning around at long last … if it doesn’t tick off customers in the process.
The news came out amid Best Buy earnings. Admittedly, the numbers are pretty ugly: BBY lost $1.7 billion in its latest quarter that ended at the beginning of March, thanks to some big one-time charges. Adjusted earnings actually beat expectations, but that’s after the retail giant had missed Wall Street’s estimates in its past two reports. Best Buy also had posted four straight quarters of year-over-year earnings declines before this recent report.
But if you back out the charges this time around, there are reasons for optimism. Holiday sales for Best Buy were impressive and a huge improvement over previous years. BBY tallied earnings per share of $2.47 in the fourth quarter, up 25% from 2011 numbers, and full-year EPS that were up 6% over the previous year.
So is the retailer really turning around? It’s hard to say. Amazon (NASDAQ:AMZN) remains the hands-down leader in electronics sales online. And though Best Buy made a flashy new hire of Stephen Gillett, a former Starbucks (NASDAQ:SBUX) chief information officer, it remains to be seen if rolling out Wi-Fi at cafes translates at all to e-commerce and propping up the company’s online presence.
At the very least Best Buy has admitted the need to change, with moves such as:
- $250 million in planned cost reductions in the next year, and a total of $800 million in cuts by fiscal 2015
- Closing 50 big-box stores in the next year
- Opening 100 U.S. Best Buy Mobile small-format stores in the next year
In short, Best Buy is getting smaller — both in its big-box operations and in its physical store size.
But there’s a huge risk here: Buried in the report today is a plan to save money through “reductions to fund investments in enhanced customer experience and growth initiatives.” In short, Best Buy is going to give up on some efforts to improve customer service and create a more welcoming store environment in favor of cutting costs instead.
That’s a tremendous gamble. Most consumers shop online because of the price benefits, but surely many shoppers also turn to the web because they flat-out hate waiting in long lines or dealing with unhelpful employees in big-box stores.
Best Buy certainly may be showing signs of a turnaround on some metrics, but Wall Street appears to be clearly in the “wait and see” camp. Shares are off sharply this morning in early trading, almost 6% down as of this writing.
If BBY cuts costs at the expense of its customers, no amount of “right-sizing” is going to save this company.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace?.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff did not hold a position in any of the aforementioned securities.