How Best Buy Bested the Doomsayers

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The demise of giant electronics retailer Best Buy (BBY) may have been greatly exaggerated. For years, critics have derided the company's heavy reliance on bricks-and-mortar stores in an age where online shopping has come to rule the retail sector. Many predicted that the company would sink into obsolescence sooner rather than later.

If Best Buy's recent results are anything to go by, however, it's doing better than many thought it would, and it might, just might, continue to survive and thrive alongside its determined e-competition.

Better Business Through Technology

Best Buy posted some very encouraging results for its fiscal third quarter 2015. Comparable-store sales rose by a bit over 2 percent. That was far better than the average analyst projection, which was for a drop of 2 percent. The firm also trounced expectations for revenue and profitability.

Why the upside surprises? One major reason is that the company managed to boost online sales by a muscular 22 percent over the third quarter of 2014. It didn't break out the exact numbers, but in the second quarter it pulled in $581 million from the activity, or nearly 8 percent of that quarter's domestic revenue.

The better online numbers are due in part to improvements to the company's web storefront, and also a comparatively new tool for retailers, ship from store. Leveraging the most competitive asset Best Buy has -- its network of 1,473 stores throughout the country -- the firm is using its inventory from those outlets to fill orders from its online customers.

This has many benefits. It gets the purchased goods to a customer quickly (as the chances are rather good that he or she has a Best Buy not far from his or her home). It also moves inventory that might otherwise go unsold, occupying valuable storage space that could be used for more popular products. It also greatly reduces the need for fulfillment centers dedicated solely to online purchases -- this is online-only giant's (AMZN) stock in trade.

Ship-from-store has quickly become serious business for Best Buy. Last year, the company was doing it from only around 400 of its outlets. In this past third quarter, that number ballooned to approximately 1,400 -- nearly all of its stores.

Bigger Spenders

Though management certainly deserves credit for Best Buy's encouraging quarter, the company's also got good timing on its side. American consumers are opening their wallets a little wider of late, and the broader retail industry is ringing up more sales.

Numerous factors play into this, most notably the fact that more Americans have jobs. The economy added 214,000 of them this past October, dipping the unemployment rate to 5.8 percent. That's the lowest number since the summer of 2008.

The nation's shoppers are also feeling more confident (i.e., flush) these days. The University of Michigan and Thomson Reuters' (TRI) Consumer Sentiment Index currently stands at nearly 89 (out of a benchmark 100), its best level since mid-2007.

Aiding these nice tailwinds for Best Buy is the latest must-haves on many a consumer's wish list; the two new iPhone 6 models from Apple (AAPL) were released during the quarter, in addition to a pair of new iPads.

As the most prominent bricks-and-mortar electronics retailer, Best Buy was a logical point of sale for many shoppers who didn't want to brave the crowds at their local Apple Store or buy the shiny new toys online from Apple directly, or one of Best Buy's rivals.

Is the Best Over for Now?

Those pleasant headwinds, though, could turn stormy. The holiday season is upon us, the time of year when the retail game gets cutthroat. As an operator of a big network of physical stores -- with all of the costs they carry -- Best Buy has more limited room to snip prices than its less burdened competitors.

Its already done so in the first nine months of this year, which we can see reflected in the gross profit margin for the period (the lower the prices, after all, the lower the margin) -- 22.7 percent, compared to 24.2 percent in the same period of the previous.

Best Buy wants to get that number going north again, so it'll resist excessive price-cutting. But as a result, the company is expecting no significant top-line growth on a year-to-year basis for Q4.

Yes, Best Buy is doing its best to better its results, and it's succeeding to a greater degree than many expected. But the retail game is a tough one, particularly in electronics, and it's especially challenging when you're the one big offline presence in the segment.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned, yet he'd really like an iPhone 6 for his birthday. The Motley Fool recommends and owns shares of both and Apple. Try any of our Foolish newsletter services free for 30 days. Check out our free report on the Apple Watch to learn where the real money is to be made for early investors.
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