Is Best Buy headed for its best Christmas ever?
Best Buy shared an optimistic view of the holiday season after posting a 3.2% third quarter comp increase at U.S. stores, but offered plenty of reasons why profitability could prove challenging.
Total company sales increased 0.6% to nearly $9.4 billion and same store sales increased 2.2%, reflecting a 3.2% increase at U.S. stores offset by a 3% decline at international locations. An online comp increase of 21.6%, on top of a prior year gain of 15.1%, was aided the rollout of ship from store capabilities. Profits from continuing operations increased to $107 from $43 million.
"In the third quarter, our teams delivered positive comparable sales, improved profitability and continued progress in our Renew Blue transformation,” said Best Buy president and CEO Hubert Joly. “This resulted in $9.4 billion in revenue and 32 cents in non-GAAP diluted earnings per share versus 18 cents last year. Operationally, this year-over-year improvement was primarily driven by 0.6% revenue growth and the benefits from our Renew Blue and other SG&A cost reduction initiatives, partially offset by strategic pricing investments and the ongoing competitive pressure on our gross profit rate.”
The company’s performance is noteworthy because NPD showed the consumer electronics category overall declined 0.2% during the third quarter. However, Best Buy showed strength in televisions, computing, and tablets versus the industry and also saw strength in gaming and appliances. The company’s 3.2% comp increase also included an 80 basis point estimated benefit associated with the classification of revenue related to new mobile carrier installment billing plans.
“As we enter the fourth quarter, we are excited about our holiday plan, which has been built around the cumulative progress we have made against our Renew Blue priorities, an operational roadmap that incorporates the specific learnings that we gained from last year and our current views on the consumer and competitive environment,” Joly said.
More specifically, Joly said fourth quarter improvement would be driven by customer-facing changes made on Bestbuy.com and in stores that touch key categories such as home theater, accessories, appliances and emerging categories such as health and wearables, connected home and digital imaging. Joly also singled out installment billing plans in the mobile phone category, a more inspirational gifting strategy and a more defined, structured and analytical approach to the company’s promotional strategy and competitive response plans as contributing factors to fourth quarter growth. Best Buy plans to make relevant and targeted marketing investments, including a more concise statement of its “expert service, unbeatable price,” value proposition. The company has also improved inventory availability with ship from store capabilities now present at 1,400 stores compared to 400 last year.
“Like every holiday, though, we believe the outcome of these initiatives is, and will continue to be, tempered by other external and internal factors – including the investments that are required to drive them,” Joly said.
Best Buy CFO Sharon McCollam said the favorable sales trends are encouraging, but noted fourth quarter profits could be challenged by factors such as an increased mix of faster growing, but lower-margin products, higher incentive compensation in retail stores, increased growth of lower margin online sales and increased investments in customer-facing initiatives. McCollam also noted the profits could be pressured by external factors such as an intensely promotional competitive environment, a possible constraint in product availability in recent high-profile product launches and a potential supply chain disruption related to the West Coast port delays.