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Best Buy Surprises the Street with Lighter Sales, Better Margins

Best Buy is excelling in milking more out of its fading business. Sales came in lighter than expected, but improving margins stunned analysts.

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They don't sell roller coasters at Best Buy (BBY), but investors probably feel as if they've been riding one lately. The consumer electronics superstore chain was one of last year's biggest winners, with its stock more than tripling. This year Best Buy has been one of the market's biggest losers, shedding nearly a third of its value in 2014 after last year's 237 percent pop.

The crazy white-knuckled ride that Best Buy has been on took some new turns on Thursday after reporting its fiscal first quarter results. Sales came in lighter than expected, but improving margins found Best Buy stunning analysts by posting improving profitability. Wall Street was braced for a 38 percent plunge.

That turnaround that the market seemed to be cheering on last year hasn't been easy to live up to this year, but its latest quarter shows that Best Buy is excelling in milking more out of its fading business. No one expected that.

Turnarounds Turn Around

It's been nearly two years since Hubert Joly was brought in as Best Buy's new CEO. The company was a mess at the time. Its former CEO was ousted after having an inappropriate relationship with a fellow employee. Best Buy's co-founder was trying to take the meandering retailer private.

Best Buy had searched far and wide for a new helmsman. The Frenchman had to secure a foreign work visa just to start the job.

Saving a struggling bricks-and-mortar chain was never going to be easy. The "showrooming" trend was -- and is -- going strong, with more and more people checking out products at local stores before turning around and buying them for less online. The irony is rich here: Best Buy sells the smartphones that make showrooming possible. And they sell the tablets, e-readers, and portable media players that have spurred the growth of digitally delivered media, and dried up the markets for CDs, video games and DVDs. In short, Best Buy is selling the products that make Best Buy less necessary.

Despite the challenge, Joly's attack plan gained traction. His five-point "Renew Blue" strategy sought to make the chain relevant again by reinvigorating the customer experience, attracting dynamic hires, cutting costs so that it could pass savings on to shoppers, and making other improvements.

Investors and employees bought into Joly's vision, but customers weren't so quick to play along.

Selling the Future

It's easy to wonder why the stock more than tripled last year. By the time the fiscal year was through we saw Best Buy's revenue, comparable store sales, adjusted earnings, and operating margins all decline for the year. Best Buy wasn't in better shape than it was a year earlier. It was doing worse in nearly every facet of the game.

Even some trends that were working for other consumer electronics retailers -- like the appliance and furniture sales that helped Conn's (CONN) and hhgregg (HGG) as housing began to boom again -- failed to make much of a difference at Best Buy.

Best Buy's report on Thursday paints a mixed portrait. It predicts same-store sales will continue to decline through the next two quarters, and that's not what Wall Street wanted to hear. However, Best Buy's strong profitability during the first quarter suggests that the company may be better positioned to withstand the showrooming trend than critics originally believed.

For now, investors don't have much of a choice. Buckle up the seat belt. Bring down the shoulder restraint. The roller coaster ride will continue.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.


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