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Best Week Ever For Best Buy?

Joly’s turnaround strategy gains strong validation

Best Buy hit the trifecta earlier this month with stronger-than-expected second-quarter results, a confirmation of ever deepening ties with Apple, and an independent report pointing to pricing parity with chief rival Amazon.

Taken together, the news served as a powerful validation of CEO Hubert Joly’s turnaround strategy for a chain that had been written off a scant three years ago, and an indication that the battered CE business may in fact be rebounding.

The unexpectedly strong Q2 results represented the company’s fourth straight quarter of U.S. sales growth. Domestic same-store sales, a key measure of applesto- apples performance, were up a robust 2.7 percent for the three months ended Aug. 2, and U.S. net revenue rose 3.9 percent year over year.

Total revenue, impacted by the consolidation of Best Buy Canada, was essentially flat, edging up 0.8 percent to $8.5 billion worldwide, but still beat Wall Street’s $8.3 billion forecast. Operating income as a percentage of revenue rose to 3.4 percent from 2.7 percent last year.

The company also killed it online: domestic web revenue of $676 million increased 17 percent primarily due to increased traffic and higher conversion rates, the company said. As a percentage of total domestic revenue, online revenue increased 90 basis points to 8.6 percent versus 7.7 percent last year.

The world’s largest CE chain attributed its solid sales performance to stronger demand for major appliances, TVs and higher average selling prices for smartphones, with economic indicators such as job growth and low fuel prices restoring some consumer spending on big-ticket items.

“We believe these better-than-expected second quarter results are affirmation that our strategy of offering advice, service and convenience at competitive prices is paying off,” Joly said in a statement.

More glad tidings came in the follow-up conference call, when Joly confirmed plans to provide AppleCare extended-warranty plans in the current quarter and expand Apple Watch availability to all 1,050 of its big-box stores and to about 30 Best Buy Mobile Stores by the end of this month. Strong demand in 100 pilot stores prompted the wider rollout, he said.

On top of that, the partners are updating their Apple stores-within-a-store, launched in 2007, with more display tables for phones, computers, tablets and the Apple Watch. “We’ve already implemented approximately 350 of them and expect to upgrade a total of approximately 520 by holiday,” he said.

He added that the AppleCare service will begin with 50 in-store pilots by holiday.

On other topics, Joly said the chain:
• Expanded its Samsung home theater stores-withina- store from 500 at launch to 603 and Sony home theater stores-within-a-store from 350 at launch to 372. The chain doesn’t build more than one type of storewithin- a-store within the same retail location.
• Rolled out five of 20 planned Magnolia Design Center stores-within-a-store for this year, increasing their presence to 63 locations, and opened 35 of the 60 additional Pacific Kitchen & Home stores-within-astore planned for this year, increasing their presence to 152 locations. The deployment “is helping us drive better customer experience and market share in particular, not only in the extreme high-end but also in the better and best part of the market, which is where a lot of the interesting action is,” Joly said.
• Began the rollout of expanded Samsung Appliance Experience centers and expects to roll out about 225 Samsung Open Houses by the end of the year, which together will represent the largest dedicated in-store display of Samsung appliances in the U.S., he said.

In other comments, Joly said “the increasing complexity and interoperability of technology products and the advent of the Internet of Things” are making Best Buy’s operating model “increasingly relevant as customers want and need more help selecting, installing, connecting, integrating, using, maintaining and taking full advantage of their products.”

The icing on the cake came by way of a pricing report by retail analyst David Magee and his team at SunTrust Robinson Humphrey. Based on a series of price checks on a 50-SKU basket of accessories and bigger-ticket items at both retailers, Magee declared that the competitors are now “essentially at parity” on price following a “gradual tightening” of the price spread over the recent past.

If anything, Magee observed, a level playing field on price could prove a win for Best Buy, which can then unleash such in-store advantages as better-trained sales personnel, branded vendor shops, and the ability to test and easily return products, he said.

He, like Best Buy, also attributed the chain’s success in part to an improving macro environment, citing a stronger housing market, more affordable UHD TVs, and the growing popularity of wearables.
– Reported by John Laposky, Joseph Palenchar and Alan Wolf