Best Buy Beats Its Q3’14 Guidance As Its Renew Blue Initiative Starts To Pay Off

Best Buy (NYSE:BBY), the largest specialty retailer of consumer electronics in the U.S., reported surprisingly strong Q3 2015 earnings on November 20th. The company reported $9.4 billion in sales, up 5.4% sequentially and a roughly flat 0.6% year to year.  Comparable store sales grew 2.4%, driven by sales growth in computing, gaming, televisions, tablets and appliances, partially offset by declines in other categories, including services and mobile (excluding the impact of installment billing). Best Buy initially expected its same-store sales to decline in Q3 2015 on account of lower expected industry-wide sales in many of the consumer electronics categories the company sells. The sales in the NPD-reported Consumer Electronic categories declined 0.2% in the quarter.

The better than expected results were primarily driven by the lower than expected sales declines in the NPD-reported Consumer Electronics categories, higher than expected revenue in computing and tablets, higher mobile revenues due to better than expected results from new phone launches, as well as the better performance of s new credit card agreement, and greater pricing and promotional effectiveness.  Offsetting this were increased investments in customer-facing initiatives.The higher revenue base and the flow-through of Best Buy’s Renew Blue initiatives, along with other SG&A cost reduction initiatives, helped the company report better than guided non-GAAP earnings of $0.32 in Q3 2014, versus $0.18 in Q3 2013.

Though the external pressures are driving structural changes in the industry, meaningful progress against its RenewBlue initiative helped Best Buy stabilize its domestic comparable sales, eliminate approximately $1 billion in costs through operational efficiencies, and lower domestic SG&A rate by approximately 170 basis points in Q3 2014 compared to two years ago.

Best Buy believes that the following customer experience and profitability initiatives will help it drive growth in the next few quarters:  1) customer-facing changes that it has made on its webiste and stores; 2) installment billing plans in the mobile phone category; 3) a more inspirational gifting strategy (including a greater assortment of products below $100); 4) a more defined and structured approach to its promotional strategy; 5) more relevant and targeted marketing investments; 6) increased inventory availability due to the rollout of ship-from-store to 1,400 stores versus 400 stores last year; 7) the regional release of large appliances and TVs; and, finally, 8) additional online exposure of certain open box inventory. However, the company did caution that the success of the above is subject to internal and external factors.

Our price estimate of $30 for Best Buy is at a more than 20% discount to the current market price. We are in the process of updating our model for the Q3 2014 earnings.

See our full analysis for Best Buy

Introduction of Installment Billing Plan For Mobile

Best Buy introduced the selling of new installment billing plans with Sprint and Verizon in Q1 2015, and started selling AT&T’s plans in Q2 2015. It is now the only national retailer to launch installment billing plans with multiple carriers. Despite major phone launches being quantity constrained, the company reporetd that the adoption of installment billing plans continued to accelerate throughout Q3 2014. Within these plans, Best Buy saw higher average phone prices and higher attach rates of services and phone accessories. In phone accessories, it expanded its exclusive assortment through new partnerships with fashion designers and growth in its own private label brands. The company expects the above factors to benefit it in the long-term, though it anticipates uncertainty around the availability of iconic phones in Q4 2014.

Athene Initiative To Improved Targeted Marketing

In Q3 2014, Best Buy contineud to shift marketing dollars away from TV and print to digital media and display campaigns including a successful traffic-generating back-to-school initiative. Additionally, it continued to provide increasingly powerful customer communication through the leveraging of its new Athena database. The company has been working on a big data project called Athena with an aim to shift its marketing efforts to more personalized email messages and offers, enabling a more targeted approach to customer marketing. Best Buy has one of the largest repositories of customer data derived from individuals’ past purchases, browsing histories, locations and demographics. While the company is still in the early stages of being able to personalize marketing messages to individual customers, it is beginning to see better click-through rates on these new campaigns when compared to mass non-targeted e-mails. Best Buy views Athena as a two to three year initiative.

An Improving Platform To Increase Online Sales

Accelerating growth in its online segment remains one of the main focus points for Best Buy, as it aims to update its website to get on par with Amazon (NASDAQ:AMZN) and other competitors. In Q3 2014, Best Buy’s domestic online revenue stood at $601 million and comparable online sales increased 21.6% due to substantially improved inventory availability made possible by the chain-wide rollout of ship-from-store in January this year, a higher average order value, and increased traffic driven by greater investment in online marketing. As a percentage of total domestic revenue, online revenue increased 110 basis points to 7.5%, versus 6.4% last year. Ship-from-store, which enables all its distribution centers (and not just the ones previously allocated to e-commerce) to handle online orders, accounted for over half of the online sales growth.

Best Buy launched several customer-facing site improvements in Q3 2014, namely:  1) significantly richer visual and editorial content for the home theater, mobile, appliance and gaming categories; 2) expanded ‘wish list’ capabilities; 3) more inspirational holiday gift center; and, 4) an improved checkout process that provides faster and precise ‘get it by’ delivery dates on approximately 60% of Best Buy delivered SKUs, rather than the present up to five-to-eight day range. In the next 24 months, Best Buy aims to further improve its online shopping experience by enhancing search tools, recommendations, and product and price information to make it easier for customers to find and choose products.

Enhancing Custom Experience In Retail Stores

Though the traffic trend to Best Buy retail locations remained negative in Q3 2014, the same improved compared to the first half of 2014. While a rising number of consumers shift online, Best Buy believes that physical stores remain important and are preferred for high-touch and large-cube transactions. During Q3 2014, Best Buy continued to improve the physical presence and shopping experience in its stores by expanding its fleet of appliance and  home theater stores-within-a-store, increasing its investments in store refresh initiatives by adding compelling vendor displays, increasing sales training and integrating new vendor-funded labor its our premium customer experiences.

Q4 2014 Outlook

– Net flat year-on-year revenue and comparable sales growth, assuming revenue declines in the NPD-reported consumer electronics categories are in line with Q3.

– An improvement in the year-over-year gross profit rate.

– A flat year-over-year SG&A dollars due to higher incentive compensation and intensified investments in customer-facing initiatives.

– An approximate 50 basis points year-on-year expansion in the non-GAAP operating income rate.

– Diluted earnings per share impact of the discrete tax items to be in the range of a negative $0.09 to $0.10.

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