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Best Buy is spending millions to maintain its sales momentum

March 3, 2015, 7:10 PM UTC
Best Buy Second Quarter Profit Drops 91 Percent
NEW YORK, NY - AUGUST 21: People walk into a Best Buy store on August 21, 2012 in New York City. Following fresh reports of weak sales results, the electronics retailer's stock opened down about 10 percent on Tuesday. Best Buy announced on Monday that it has named Hubert Joly to be its new chief executive. (Photo by Spencer Platt/Getty Images)
Photograph by Spencer Platt—Getty Images

Can Best Buy maintain its momentum?

The electronics retailer on Tuesday said its U.S. same-store sales increased for two consecutive quarters — the first time that’s happened in nearly five years — and outlined plans to spend millions more to ensure it can maintain that growth rate.

The retailer, which reported a 77% jump in quarterly profit, is planning to spend $650 million to $700 million in the current fiscal year on capital expenditures, an increase from the $550 million it spent last year. It will spend more to improve the customer experience in brick-and-mortar retail stores and online, as well as on marketing and information technology. Supply chain and the way Best Buy handles returns and damaged goods are other areas of focus.

“To win, investing now is imperative,” Best Buy’s Chief Executive Hubert Joly told investors during a conference call.

Under Joly’s leadership, Best Buy (BBY) has enacted a turnaround thanks to efforts to trim expenses, shed assets in Europe and China, and focus more on improving the business at home. It has achieved a lot of success against a tough backdrop: industry sales of desktop computers and printers have faltered, and online competitors such as Amazon.com (AMZN) have made it harder for traditional retailers to compete. Peers like Circuit City and RadioShack have already fallen into bankruptcy.

However, Best Buy has made some interesting defensive moves. It has carved out space for “stores-within-a-store” formats focused on brands such as Samsung and Windows, and the retailer has also stocked more large appliances, including refrigerators and washers and dryers, that are more often bought at a store rather than online. Since Joly took over in 2012, Best Buy’s share price has doubled.

Joly warned that Best Buy’s operating income would face pressures in the current year as a result of the higher spending. He said the spending is needed to counter competitive and costly customer service expectations, such as free and faster shipping, and rapidly-declining selling prices in some key product categories.
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Best Buy’s cautious commentary about the new year, which percolated throughout the conference call, was viewed as simply a ruse by some Wall Street observers.

“While management’s commentary was downbeat, we remind investors that Best Buy has a long history of ‘under-promising and over-delivering,'” said BB&T Capital Markets analyst Anthony Chukumba.