Best Buy Surprises With Strong Sales Growth And Margin Improvement; Will Continue To Invest In Stores-Within-A-Store Format

Best Buy (NYSE:BBY) recently released its financial results for the quarter ended August 1, 2015 ^[1]. To everybody’s surprise, this quarter’s performance was in sharp contrast with that of the previous quarter, when sales stayed flat year-over-year and the bottom line fell due to one-time charges. As the company exceeded expectations on both revenues and profit this time around, the stock jumped by as much as 15% following the results. Comparable sales increased 3.8% compared to a 2% decline during the same period last year and operating margin improved from 2.7% to 3.4%. While sales benefited from growth in the large TV category, margins improved due to a better product mix and cost savings from consolidation in Canada.

The outlook for the rest of the fiscal also looks positive as consumer confidence (a leading indicator of consumer spending) in the US continues to improve ^[2]. Below,  we take a closer look at some of the factors discussed above and also discuss the key forces that, we believe, will drive Best Buy’s growth ahead. Our price estimate for Best Buy currently stands at $36, which is about 10% above the current market price.

Better Than Expected Retention in Canada Stores

Earlier in March, Best Buy announced that it would close 66 Future Shop locations and re-brand the remaining 65 Future Shop stores under the Best Buy brand. The company saw an opportunity to cut down operating costs as it discovered that a significant number of its Future Shop and Best Buy stores were located adjacent to each other, often in the same parking lot. But, the cost reductions came at the risk of losing sales from the closed stores (net of retained sales).

However, it turned out that the remodeled stores retained higher-than-expected sales, which meant that Best Buy could generate more sales than before in the remodeled stores, but at the same operating cost. This partially contributed to the 70 basis point improvement in the operating margin to 3.4%, which is almost twice the average operating margin seen in the last five quarters (i.e. 1.8%).

Increasing Complexity of Technology Products Will Benefit Best Buy

The company is strengthening its position in growing categories, such as appliances, by expanding its store-within-a-store format. Best Buy began rolling out the Samsung Appliance Experience centers in its stores and the company expects to roll out approximately 225 Samsung Open Houses (dedicated in-store display of Samsung appliances) by the end of the year. Other additions made during this quarter include home theater stores-within-a-store from Samsung and Sony.

Best Buy continues to invest in these store formats despite focusing on cost reductions elsewhere. This doesn’t come as a surprise because appliances is the fastest growing category at Best Buy and also offers better margins than most consumer electronics categories. In the recently concluded quarter, the appliances category grew by more than 20.7%, accelerating from an 8% growth in the same period an year ago.

As the complexity and interoperability of technology products increases, product categories such as connected homes and health and wearables are seeing momentum. These trends make Best Buy’s click-and-mortar model increasingly relevant compared to pure online competitors such as Amazon.

View Interactive Institutional Research (Powered by Trefis):

1. Best Buy Investor Relations [↩]
2. US CB Consumer Confidence – Investing.com [↩]