Best Buy CEO sees 'growth opportunities' ahead, Wall Street isn't buying it

Key Points
  • Best Buy meets with investors Tuesday to outline new goals for its next phase of growth.
  • The retailer sees a number of opportunities, including growing its smart home business and gaining mobile market share.
  • "This is an opportunity rich environment," Best Buy's CEO tells CNBC in an exclusive interview.
CEO Hubert Joly: Best Buy 2020 focused on growth

It's been five years since Best Buy held an investor meeting. And while much has changed since the last one, there will still be skeptics in the audience at its Richfield, Minnesota, headquarters.

At its last one, in November 2012 in New York, then-new chief executive Hubert Joly laid out his transformation plan "Renew Blue" to reverse sales declines and improve profitability through cost cuts and growing online sales.

Best Buy did just that.

"Five years ago the times were different. We had negative comps. Our margins were going down. There were questions about whether we were going to survive," Joly acknowledged in an exclusive CNBC interview.

Earlier this year, Joly concluded the transformation was complete.

"We've had four years of positive comps. Our margins have expanded. We have been, in the last five years, in the top 10 percent of the S&P 500 from a total shareholder return standpoint. Customer satisfaction is up. We're gaining share," he said.

"We've become relevant again," Joly said, smiling. "And I couldn't be more proud of what our associates have accomplished."

Speaking to CNBC ahead of the meeting, he outlined areas where he sees potential growth, such as in the connected home market and with smartphones. He said the transformation strategy was mainly about "fixing what was broken." The new strategy, Best Buy 2020, pivots and is "focused on growth.

Tuesday morning Best Buy released new financial targets for fiscal 2021 that it will discuss in detail at the meeting, as it outlines its plans for the next phase of growth. Investors were clearly disappointed, sending shares down more than 8 percent.

Revenue is expected to grow to $43 billion in fiscal 2021, versus $39.4 billion in fiscal 2017. Meanwhile, the company will look to realize $600 million in annual cost savings by the end of fiscal 2021.

As a result, Best Buy estimates its adjusted operating income in fiscal 2021 will be between $1.9 billion to $2.0 billion versus $1.7 billion in fiscal 2017. On an adjusted basis, its earnings are projected to be in the range of $4.75 to $5.00 a share, which is an 8 to 9 percent compound annual growth rate from fiscal 2017.

"We've taken the time to look at the strategic landscape. And we think that we are operating in a very attractive environment that's full of growth opportunities," Joly said.

Still, Best Buy will have to sell this strategy to investors. But that's nothing new, five years ago, some had doubted whether Joly was right for the job. While he had turnaround experience, he had spent the last eight years in the hospitality industry and was leaving his position as CEO of hotel group Carlson to lead a U.S. consumer electronics retailer.

"We were consistently skeptical of Mr. Joly's lack of retail experience," Wedbush analyst Michael Pachter said in a note to investors. However, he added, "the company has executed nearly flawlessly since CEO Hubert Joly joined five years ago."

Still, Pachter has an underperform rating on Best Buy shares because he wonders if it can sustain its growth as a price war rages between retail behemoths Amazon and Wal-Mart.

Going after the connected home market

The connected smart home might be the most comprehensive category for the retailer to find opportunity under the new strategy for both service and product sales.

According to various estimates, the global smart home market is expected to grow to $33 billion to $50 billion over the next four years. Piper Jaffray analyst Peter Keith estimates Best Buy could capture 10 percent market share in the connected smart home sector, which would add more than a full percentage point of same-store sales growth through 2021.

A big initiative to capture that share is Best Buy's new In-Home Advisor program. After testing the program for more than a year in a handful of cities, it's currently rolling it out nationwide with a workforce of 300.

This program differs from Best Buy's Geek Squad because it's a free service. Best Buy employees with deep knowledge across product categories and brands go to customers' homes and provide technology advice and guidance on anything from increasing appliance efficiency to improving Wi-Fi connectivity to setting up home assistants that speak to the sound system and thermostat.

While the program is in its infancy, the In-Home Advisors are already individually profitable. Joly says what's even better is the potential for long-term relationships with consumers.

"Economically for us it's attractive because it helps make customers happy, build a relationship and grow the revenue line," he said. The margins are also better as the In-Home Advisors "unlock unmet needs" consumers don't realize they have until someone can assess their homes, Joly said.

By the end of October, 450 Best Buy stores will have a smart home powered by Vivint section, and 1,500 smart home employees will join the team.

Additionally Tuesday, Best Buy announced it's testing a service it calls Assured Living in Minneapolis and Denver, which uses technology to help loved ones check in on the safety and well-being of aging family members.

Joly used an example of a woman he calls an alpha mom, who does everything for everyone, to explain how Assured Living might help her keep tabs on her aging parents. "There's a sensor under the bed or in the medicine cabinet with an app and artificial intelligence, she'll be able to be alerted if something is wrong."

But Best Buy is counting on millennials for the biggest opportunity when it comes to the connected home. The retailer's market share with millennials is higher than any other demographic.

"[Millennials] are finally leaving their parents' home and so they're actually moving to the suburbs. And so they need to equip their home," Joly said.

Aiming for mobile market share

Millennials, along with most other demographics, count on their smartphones for more and more in their daily lives. But Best Buy has a relatively low market share in mobile. Part of Best Buy 2020 aims to change that.

"Buying a phone can be daunting. It's a very expensive purchase. You have many choices you need to make," Joly said. "We have a number of initiatives and improvements to the shopping experience, making it easier for customers to find out what plan they should buy, making it more efficient to get the phone."

Joly declined to comment on his expectations for the new Apple iPhones and anticipated Android smartphone releases this fall.

Amazon: Foe and friend

For years, the narrative surrounding Best Buy and Amazon was that the consumer electronics retailer was becoming merely a showroom for shoppers that ultimately bought on Amazon. This summer when news surfaced that Amazon was building its own Geek Squad-like service, Best Buy shares took a hit.

But Joly has shown Best Buy can exist in an Amazon world, and in some cases, the two work together.

Best Buy is rolling out new Amazon Alexa and Google Home assistant experiences to 700 stores. Best Buy employees will demonstrate how the smart home assistants work and Geek Squad members can provide help with support and installation, which fits in with the connected home strategy.

Joly said his company's mission is to offer customers the best products in the market, and he puts Amazon's Echo devices and its Fire TVs in that category. Joly said that means "showcasing in our stores products from people who sometimes are our competitors."

Amazon also indirectly helped Best Buy's online sales in July. Joly told analysts on its second-quarter earnings call that Amazon Prime Day was "quite strong for us." In fact, Best Buy's online comparable sales grew more than 31 percent in the second quarter, the strongest result under Joly yet.

The holiday season

Although Best Buy also posted its strongest same-store sales growth in seven years, its shares plunged more than 5 percent that August day after Joly and CFO Corie Barry laid out their holiday projections.

The executives warned analysts not to get used to 5.4 percent growth as "the new normal."

They also said the holiday quarter is hard to predict because it has very different characteristics than the rest of the year, particularly with the expectation for deep discounts from competitors.

The fact is while Best Buy has been on a nice streak, the retailer hasn't turned in positive same-store sales growth during the holidays since 2014. Its current forecast doesn't point to a break in this pattern.

Joly wouldn't elaborate on his expectations for the all-important season. He said, he's focused beyond it with Best Buy 2020.

Ever an optimist, Joly said "this is an opportunity-rich environment."

But he's also a realist, and understands the challenge that comes with the quickly evolving consumer landscape.

"It's going to be a journey" Joly said. "We're looking forward to it."

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