Advertisement
Canada markets close in 3 hours 56 minutes

  • S&P/TSX

    21,818.37
    -55.35 (-0.25%)
     

  • S&P 500

    5,019.59
    -52.04 (-1.03%)
     

  • DOW

    37,913.53
    -547.39 (-1.42%)
     

  • CAD/USD

    0.7303
    +0.0005 (+0.07%)
     

  • CRUDE OIL

    82.49
    -0.32 (-0.39%)
     

  • Bitcoin CAD

    87,929.20
    -709.40 (-0.80%)
     

  • CMC Crypto 200

    1,381.99
    -0.59 (-0.04%)
     

  • GOLD FUTURES

    2,341.90
    +3.50 (+0.15%)
     

  • RUSSELL 2000

    1,965.84
    -29.58 (-1.48%)
     

  • 10-Yr Bond

    4.7100
    +0.0580 (+1.25%)
     

  • NASDAQ

    15,488.01
    -224.74 (-1.43%)
     

  • VOLATILITY

    16.75
    +0.78 (+4.88%)
     

  • FTSE

    8,078.86
    +38.48 (+0.48%)
     

  • NIKKEI 225

    37,628.48
    -831.60 (-2.16%)
     

  • CAD/EUR

    0.6811
    -0.0008 (-0.12%)
     
MARKETS LIVE BLOG:

STOCKS SLIDE AFTER META'S REALITY CHECK, WITH GDP ON DECK

Owner of Facebook and Instagram plans to spend up to US$10B on AI infrastructure investments

Can Best Buy Expand Margins Enough to Benefit 1Q16 Earnings?

Sharon Bailey

Earnings Preview: Will Best Buy Be a Good Buy in 1Q16?

(Continued from Prior Part)

Optimization program

In fiscal 2016, Best Buy (BBY) started the second phase of its Renew Blue cost reduction and gross profit optimization program. The company expects to derive benefits of ~$400 million over three years from this phase. Meanwhile, whatever incremental savings Best Buy realizes in the second half of fiscal 2016 will be offset by the company’s significant investments in growth initiatives.

Gross margin under pressure

Best Buy’s gross margin continued to fall in fiscal 2015 ending January 31, 2015. The margin contracted to 22.4% from 23.1% in fiscal 2014. This decline was mainly due to an unfavorable comparison with fiscal 2014, which included a $264 million legal settlement gain related to litigation over the price of liquid crystal displays sold in the US.

ADVERTISEMENT

Operating margins improve

Best Buy’s operating margin improved to 3.6% in fiscal 2015, up from 2.8% in fiscal 2014. This improvement was a result of lower selling, general, and administrative expenses, helped along by the company’s Renew Blue cost-reduction initiative and tighter expense management. Since the implementation of the first phase of its Renew Blue productivity program in 2012, Best Buy has generated $1.02 billion in cost reductions.

Weak industry demand, pricing pressure from online retailers like Amazon (AMZN), and the reduced average selling prices of key product categories are exerting pressure on the company’s margin.

Best Buy and Amazon together account for ~2% of the portfolio holdings of the SPDR S&P Retail ETF (XRT).

Scaling down

In an effort to improve its productivity, Best Buy has been closing unprofitable stores. In March 2015, the company announced its plans to close 66 Future Shop locations in Canada and to consolidate other Future Shop stores and online channels under the Best Buy brand. Before that, Best Buy completed the sale of its Five Star business in China in February 2015.

In early 2015, Target (TGT) and Sony (SNE) also announced the closure of all their stores in Canada.

Continue to Next Part

Browse this series on Market Realist: