Best Buy Co Inc (BBY) announced last week that it was expanding its same-day delivery service to 11 markets across the country, including Los Angeles and Chicago, two of the largest metropolitan areas in the U.S.
Best Buy critics will suggest it’s merely trying to keep up with Amazon.com, Inc. (AMZN) who added 11 same-day markets of its own last week, upping Amazon’s same-day coverage to 27 major metropolitan markets with more than a million product SKUs for same-day delivery.
Best Buy can’t possibly compete with e-commerce giant Amazon.com, can it? Isn’t this just another example of BBY being a dollar short and a day late in the battle with Jeff Bezos? Not by a long shot.
Best Buy Follows 80/20 Rule
While AMZN might cover more markets, a bunch of them aren’t going to move the needle when it comes to revenue. Fresno, California; Tucson, Arizona; Richmond, Virginia; Louisville, Kentucky; and Milwaukee are all very nice cities, but they’re hardly chockablock full of people.
Meanwhile, Best Buy’s same-day delivery covers 70% of the U.S. population. It’s the old 80/20 rule: 20% of your markets are going to generate 80% of your revenue. Los Angeles, New York, and Chicago will move the needle — for both companies.
Best Buy will ship almost everything in its inventory that’s 50 pounds or less, charging between $10-$20 for the delivery and guaranteeing same-day arrival by 9 p.m. It can do this because Deliv Inc., the same-day delivery service it’s contracted to make the deliveries, will get the inventory from the 165 Best Buy stores located in those 13 markets. It’s a natural extension of the ship-from-store policy initiated by the company in January 2014.
Best Buy CFO Sharon McCollam called its ship-from-store initiative in its Q4 earnings call in late February “one of the most important and strategic decisions in [Best Buy’s] history.”
And why not.
Its online business grew 13.7% year-over-year in Q4 to $1.95 billion, representing 15.6% of its domestic segment’s overall Q4 revenue — a 200 basis point increase from Q4 2015. In terms of fiscal 2016, in its entirety, online revenue grew 13% year-over-year to more than $4 billion or 11% of its domestic segment’s overall revenue. Only two years earlier, this number was just 7% of overall domestic revenue.
With the implementation of same-day delivery to all its major domestic markets, the investments made by Best Buy on its ship-to-store inventory fulfillment system over the past two years have become that much more important, while its return on investment that much quicker.
In fiscal 2016, BBY returned $1.5 billion to shareholders including a 45-cent special dividend. Just a few days ago it paid another 45 cent special dividend, upped its regular quarterly dividend in fiscal 2017 by five cents to 28 cents and plans to buyback another $1 billion over the next two years. Free cash flow won’t be a problem.
The question is whether Best Buy is doing enough to merit your investment. I believe it is.
Bottom Line on BBY Stock
In Q4, customers spent more per order, whether we’re talking online or in the stores. Not only that, but its conversion rate and traffic were also higher, suggesting, at least to me, it is doing enough on the top line to keep AMZN at bay.
Whether that translates to the bottom line is another thing altogether.
CEO Hubert Joly suggested in its Q4 conference call that it can eliminate an additional $250 million in annual costs over the next two years to go along with the $1.15 billion already extracted from phases one and two of “Renew Blue,” Joly’s turnaround plan he first revealed in November 2012.
Yes, there have been bumps along the way, but for the most part, Joly’s turnaround plan has gone exceedingly well.
Will same-day delivery save the day?
I’m not going to answer that because to do so implies the company is on less-than-stable ground, and that’s simply not the case.
So, let me say this. The addition of same-day delivery can only help the business, not hinder it. And that’s a good thing if you hold Best Buy stock.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
