Best Buy bulls prevail, for now

Best Buy Posts First Quarterly Profit In A Year
People walk by a Best Buy store in New York City in this August 2013 file photo.
Spencer Platt/Getty Images, file

Best Buy reported a big improvement in its first quarter results Thursday, thanks to more cost-cutting and a tax windfall.

The consumer electronics giant reported net income of $461 million for the period that ended earlier this month. A year ago, the company lost $81 million. But although the long-struggling retailer is far from fixed, it is making progress, CEO Hubert Joly said.

"While we remain mindful of the fact that we still have a lot to do in our Renew Blue transformation, the first quarter results clearly demonstrate the progress we are making towards improving our operational performance," he said.

ā€¢ More: Best Buy profits from cost-cutting, tax benefit

Create a More Connected Minnesota

MPR News is your trusted resource for the news you need. With your support, MPR News brings accessible, courageous journalism and authentic conversation to everyone - free of paywalls and barriers. Your gift makes a difference.

However, a big non-cash tax benefit was a big factor in the company's profits, and other results show lots of problems remain. For the ninth straight quarter, sales declined compared to the same period a year before.

Best Buy expects sales to keep dropping in the next two quarters, as consumers await some hot new products.

Still, chief financial officer Sharon McCollam said company officials are confident about the all-important holiday season. For one thing, manufacturers are bringing more sophisticated TV sets to market.

"We are very optimistic about the opportunity to showcase such an impressive lineup of television and home theater for this holiday," she said. "I think we all believe that there's going to be some exciting innovation in several of our categories, including mobile, sometime this year."

Industry observers say the company's less than inspiring forecast between now and the holidays reflects how long it takes to transform a huge operation like Best Buy, which has more than 1,400 stores and 140,000 employees.

"You have to give Best Buy credit for not creating undue optimism," said Carol Spieckerman, president and CEO of newmarketbuilders, a retail consulting firm.

"They're certainly being realistic about their near-term prospects and Mr. Joly said from the start that this was not going to be an overnight success," she said.

But Spieckerman thinks Best Buy could revive its business and prosper.

"They're moving in a lot of really exciting directions, pricing strategies, their ship-from-store initiatives," she said. "So, they've got a lot of pins in air right now and I think the big bet is that all of those pins are going to land in the right places and give them some real momentum."

Joly's attempt to remake Best Buy wins praise from Robin Lewis, CEO of The Robin Report, a retail industry newsletter.

But Lewis said Best Buy and Joly face many unfavorable trends, from a lack of hot products to consumers losing their affection for big-box specialized retailers that focus on a limited range of products.

"He is a victim of marketplace dynamics that frankly are kind of out of his control," Lewis said. "Best Buy continues to be victim of the two pincers: Walmart on one side and Amazon on the other. The pricing situation doesn't get any better and it's much more difficult for him to compete."

One of the main ways Best Buy is trying to compete is by cutting expenses so it can lower prices and still make money. The company has managed to cut annual costs by about $860 million, with more trimming to come.

The question is whether that will be enough to survive against Walmart and Amazon.

Analyst Michael Pachter with Wedbush Securities doesn't think so.

He said Best Buy can't keep on cutting its way to profitability. Pachter sees two trends that he says are deadly ā€” declining sales and declining profit margins.

"That is fatal," he said. "If your sales decline and your profit on those sales declines, then you make less money and the only way you can offset that is to spend less. But there is a practical limit to how little you can spend. You can't just not pay your rent or not pay your people."

Best Buy's financial results fueled a battle among bullish commentators and bears who saw doom. One Wall Street analyst said the Best Buy's turn-around initiatives were starting to help the bottom line.

That helped boost the company's share price as high as 8 percent this morning. But another commentator said the rising stock was a sucker's rally. In the end, the bulls prevailed, at least for today. The stock closed up about a three and half percent.