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Can Best Buy’s Renew Blue Strategy Help Its Fiscal 4Q16 Margins?

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Renew Blue strategy

One of the key priorities of Best Buy’s (BBY) Renew Blue turnaround strategy is to enhance margins by reducing costs and improving operating performance. Under the ongoing phase two of Renew Blue’s cost reduction and gross profit optimization program, Best Buy aims to generate $400 million of savings over the course of three years. In the first three months of fiscal 2016, Best Buy was able to eliminate $110 million in annualized costs. However, these savings are expected to be offset by the company’s growth initiatives.

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Margin expansion in previous quarter

In fiscal 3Q16, which ended October 31, 2015, Best Buy’s gross margin expanded to 23.9% from 23.0% in 3Q15. This increase was primarily the result of higher margins in the domestic segment driven by the following factors:

  • lower costs due to lower claim frequency and severity resulting from changes in mobile warranty plans
  • an increased mix of higher-margin large screen TVs
  • decreased proportion of the lower-margin tablet category

Best Buy’s operating margin in 3Q16 increased by 30 basis points to 2.6%, primarily due to the company’s productivity initiatives under its Renew Blue program. Best Buy constitutes 0.1% of the iShares Russell 3000 ETF (IWV).

The operating margins of peers GameStop (GME), Aaron’s (AAN), and Conn’s (CONN) were 4.5%, 5.6%, and 4.5%, respectively, in their comparable third quarters.

Margin expectations

Best Buy’s 4Q16 gross margins are likely to be affected by the company’s investments in services pricing, higher distribution costs associated with the growth of the online business, and pressure on product mix and product cycle. The 4Q16 operating margin is expected to be affected by higher SG&A (selling, general, and administrative) expenses related to the company’s growth initiatives.

In an update provided on January 14, the company stated that it expects its non-GAAP (generally accepted accounting principles) operating margin in 4Q16 to decline by 15–30 basis points, compared to the previous expectation of a decline of 25–45 basis points. The company stated that improvement in its 4Q16 operating margin outlook was the result of a disciplined promotional strategy and strong expense management.

We’ll discuss the trend in the company’s stock price in the next part of this series.

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