Pressure on margins

Declining sales and pricing pressure caused by increased competition have impacted margins of consumer electronics retailers such as Best Buy (BBY).  One of the main priorities of the company’s turnaround strategy—renew blue—is to improve its margins by cutting costs and increasing supply chain efficiencies.

Best Buy’s margins show improvement

Improved margins

Best Buy’s cost-reduction initiatives have helped improve its operating margins. The company reported margins of 2.69% for the fiscal year ended February 1, 2014, compared to -0.30% for the previous year. Also, the company allocated more store space to high-growth categories such as mobile phones, appliances, and accessories compared to declining low-margin products, like music and movies. The company’s long-term goal is to deliver an operating margin of between 5 and 6%.

Comparisons

GameStop (GME), a multichannel video game and consumer electronics retailer, generated an operating margin of 6.34% in fiscal 2013. The company’s used video games, which account for around 25% of its net sales, enjoy significantly higher margins than new games.

Wal-Mart Stores (WMT), which sells both consumer staples (XLP) such as food and consumer discretionary (XLY) products like electronics, reported an operating margin of 5.64%. The company’s margins are declining due to the low-margin grocery business. Online retailer Amazon.com (AMZN) generated a low operating margin of 1% in 2013, due to lower prices on its products and high investments in infrastructure.

Best Buy’s margins might continue to come under pressure because of its price matching policy and higher sales mix of fast-growing but lower-margin products, such as gaming and computing.

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