Best Buy reports 1Q loss of $81M

Best Buy is making good progress towards cutting costs, CEO Hubert Joly said, but the turnaround still has a way to go.

"We are remaining focused on the two problems we have to solve: Stabilizing and improving our comparable store sales and profitability across all parts of our business," Joly said.

Those problems are sales and profits, Joly said. Net income, excluding the European operations, fell from about $170 million to under $100 million. Comparable store sales fell 1 percent.

But the calendar contributed to the decline. The Super Bowl, which typically drives television purchases, occurred in the prior quarter. The chain's first quarter also had seven fewer selling days than first quarter last year.

Wall Street recently has grown more confident in Best Buy. The consumer electronics retailer's stock has more than doubled so far this year. But the company's future success is still far from certain, Edward Jones analyst Brian Yarbrough said.

"There are just a lot of question marks out there: the turnaround, the management team," Yarbrough said. "The big wild card is how much more do margins continue to go down. They're continuing to lower prices to be more competitive. But that is at the expense of profitability."

Analysts also expect price competition could get more intense. As the Richfield-based company lowers prices to win back sales, rivals will respond in kind, said R.J. Hottovy of Morningstar.

"You've got Amazon, Costco, Walmart ... still with a number of competitive counter-measures at their disposal," Hottovy said. "They have price investments of their own they could be making. Best Buy still has some challenges in terms of driving people not only to its stores, but also online over a much longer horizon."

But Hottovy likes Best Buy's efforts boost online sales, which rose 16 percent domestically. He's been impressed with the retailer's success so far in a campaign to cut annual costs by $400 million.

"I do give the company credit for a lot of the cost-cutting initiatives they've put in place and how quickly they've done it," Hottovy said. "At least, they're doing something to reduce their cost structure, which keeps them in the game and makes them much more relevant."

During a conference call with analysts, Joly said Best Buy plans to revamp its website and take other steps to punch up online sales. Within the year, Joly says Amazon will be collecting sales taxes in states are home to half the U.S. population, which will mean Amazon and Best Buy will be competing on equal terms in those states.

"In states that are already collecting, we're seeing an incremental benefit in our online and retail store sales," Hottovy said.

Joly said Best Buy is also creating clearance zones in its stores to help reduce the cost of returned, replaced and damaged goods, which are currently more than a $400 million annual hit to the company's bottom line.

Overall, investors seemed to focus on the coming struggles. Best Buy's share price closed down 4 percent at $25.64. That's still more than double last fall's low when the share price fell below $12.

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