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Best Buy Fueling Across-The-Board Initiatives

MINNEAPOLIS — Refusing to rest on its laurels after delivering its best quarterly performance in years, Best Buy said it will invest an additional $120 million in the business during its current fiscal year and is upping its capital expenditures by as much as $150 million.

The money is being earmarked for a wide range of initiatives encompassing the in-store and online experience, supply chain and marketing.

“It is imperative that we continue to focus on driving comparable sales and improving operating margins while spending investments in our future,” president/ CEO Hubert Joly told investors on an earnings call earlier this month.

On the brick-and-mortar front, the company will capitalize on the UHD TV cycle by opening 20 more in-store Magnolia Design Center shops, bringing the total of these premium A/V and custom-install boutiques to 78.

Focusing on categories with a high barrier to entry, the retailer will also add 50 more Pacific Kitchen & Home premium appliance departments, bringing the total to 177 stores. On the earnings call, executive VP and chief financial officer Sharon McCollam described the Magnolia and Pacific departments as “very successful for us,” and said the customer is also responding to its vendor storeswithin- a-store and other enhancements to its sales floors.

“We’re finding that there are ways for us to significantly enhance the customer experience through investment in the transformation of the footprint,” she said. “And we expect to continue to invest in that this year.”

Elsewhere in the store, Best Buy will:
• grow its connected home and health/wearables businesses;
• expand its assortment of private-label and exclusive branded products like its direct-sourced Sharp TV line;
• continue to fine-tune its analytics-driven price promotions;
• increase product training for sales associates; and
• tailor assortments to local markets.
Joly noted that the company is “gradually optimizing” its real estate, but has intentionally limited store closures to “minor numbers so far” since the showrooms serve as an important “touchpoint” with customers and are beginning to function as mini-fulfillment depots for online orders.

Online, the company’s new Seattle tech center will be tasked with accelerating the development of its m-commerce capabilities, as “our traffic for mobile phones is growing much faster than traditional desktop traffic,” Joly said.

Other online initiatives include:
• adding mobile carriers’ new installment billing programs;
• better integrating Geek Squad services and extended warranty offers;
• improving the majap purchase experience; and
• providing more visibility for its open-box and returned inventory, the resale of which is saving the company hundreds of millions of dollars.

Within marketing, plans include an effort “to capture customers at the time of key life events,” like marriage and moving, in order to build long-term relationships, Joly said. The company will also up its targeted marketing, including personalized email campaigns and a customized web experience that presents relevant landing pages to customers.

Elsewhere, Best Buy will continue to upgrade its supply chain in order to make more e-commerce inventory available for shipping from stores, and to improve its ability to ship, deliver and install large products like big-screen TVs and major appliances. To that end, the company will replace its warehouse management system and will leverage new regional inventory capabilities that were launched in October, Joly said.

Tying into that will be a greater push on the services side, including an improved delivery and installation experience, and increased marketing support and greater Geek Squad integration online, to help boost extended warranty attachment rates.

Underscoring the importance of the segment, Joly is overseeing the unit himself while the company searches for a successor to president Chris Askew.

Helping to fund the initiatives are expected cost savings of $400 million over the next three years as the company launches the second phase of its “Renew Blue” cost reduction and gross profit optimization program, Joly said.

Despite the momentum, the CEO warned that Best Buy will continue to face industry and economic pressures this year, including the higher competitive costs of free and faster shipping, and rapidly declining demand and average selling prices in some key categories in-cluding extended warranties.

“So to win against this backdrop investing now is imperative,” Joly concluded. “While these investments will put pressure on our fiscal 2016 operating income rate … we believe they’ll leverage our exceptional momentum and will allow us to build a differentiated customer experience and the foundation for long term success.”

In a research note titled “What A Difference A Few Years Make,” Janney retail analyst David Strasser reminded investors that “three years ago Best Buy was going out of business, as they could not compete with Amazon.”

Instead, Best Buy’s announcements included a shareholder distribution of $850 million in cash, including a $1 billion share repurchase program over three years, made possible due to a $3.9 billion cash balance and cash flow of nearly $2 billion.

“We maintain our ‘buy’ rating,” Strasser said.