After 23% Q3 Revenue Growth, Best Buy Tempers Holiday Expectations

Best Buy's Q3 comparable sales surged 23% year on year to $11.8 billion, riding October promotions including a Prime Day sales lift and early holiday deals, said CEO Corie Barry on a Tuesday investor call. Domestic revenue grew 21% year on year to $10.85 billion in the quarter ended Oct 31.

Online sales jumped 200% year on year in October, said Barry, while ship-to-home speeds reached their highest level since the pandemic began. Domestic online revenue spiked 174% vs. the 2019 quarter and grew to 35% of total domestic revenue, vs. 15.6% of the revenue mix last year, said the company. Barry highlighted strength in computers, large appliances and a return to growth for home theater, a “significant contributor” to the comparable sales bump. The retailer has had growth in new customers since the pandemic and those “we haven’t seen in a while who re-engaged with us,” she said. The gaming console refresh brought in new customers, noted Chief Operating Officer Mike Mohan.

Best Buy didn’t give Q4 guidance, citing “ongoing uncertainty.” Chief Financial Officer Matt Bilunas tempered expectations for the holiday quarter, saying sales will be positive “but we don’t expect sales trends to remain at the levels we experienced during Q3.” Bilunas cited the surge in COVID-19 cases in the U.S. and Canada during a time of “significant holiday volume” in stores, online and in the supply chain. Other factors to consider are potential government stimulus action, a shift in personal consumption spending from travel, dining and entertainment, the risk of continued high unemployment and available inventory “to match customer demand.” The stock closed 7% lower Tuesday at $113.54.

Demand remains at “elevated levels,” similar to Q3, but “it continues to be difficult for us to predict how sustainable these trends will be,” said Bilunas. In Q&A, he said, “We don’t necessarily expect the trend of Q4 to continue on at that Q3 pace,” though he stopped short of signaling “sharp declines.” He noted significant shopping events ahead this week, on Cyber Monday and the week before Christmas.

Best Buy had supply constraints entering Q3, Barry noted. Inventory improved but continued constraints in a number of categories moderated sales growth for the quarter, particularly in large appliances and computing. Due to inventory shortages, Best Buy had less “promotionality” year on year in Q4, said Bilunas. That will increase “a bit” in Q4, said the executive, but “considering the elevated level of demand and continued constraints in some areas of inventory, we don’t expect it to be a year-over-year pressure.”

Mohan said Best Buy received more merchandise in its fiscal Q3 than in the company's history, but tight inventory will continue through early 2021. Major appliances were impacted by inconsistent demand and COVID-19 factory shutdowns. Computing products remain tight: “It’s been back-to-school or back-to-work-at-home or back-to-educating-at-home since March.” Best Buy has “great relationships” with the top computer OEMs and is working with them daily to meet demand, he said. Despite tight supplies, there will be enough inventory to support sales, he said.

The supply squeeze for new gaming consoles will last through the holiday season but should free up soon after, Mohan said. Such shortages play out every six or seven years with new gaming format cycles. The situation is heightened this year because more consumers “need something to do with their families at home," he said.

Best Buy’s “world-class partners,” Microsoft and Sony, “didn’t do us any favors the way they launched products,” said Mohan. As Best Buy gets more console inventory during the holiday season, it will release product in a way consumers can find it easily on Bestbuy.com, he said. The retailer is trying to “protect the experience so people that are trying to buy it and resell it can’t get through our site as easily as perhaps other places.” He couldn’t say how many consoles Best Buy will sell “because I actually don’t know how many we’re going to get." The retailer will "work our best to get our unfair share of allocation to take care of as many customers as possible.”

Sales in the first few weeks of Q4 have been strong. Q4 revenue will likely be affected by a pull forward of sales in October due to the early start of the holiday sales season, said Bilunas. Inventory constraints are expected to continue in key categories, he said. Gross profit will be pressured by higher shipping costs due to a better mix of online sales. Best Buy also expects a higher sales mix from lower margin gaming consoles, legacy game systems that still have high demand.

Best Buy is “constantly adjusting our operations” and piloting new experiences to be able to “flexibly respond as the course of the virus changes,” said Barry. Stores extended curbside pickup hours to 8 p.m. from 7 p.m., she said, allowing customers to pick up items before and after stores close. All store pickup orders have been shifted to curbside pickup to reduce the number of people in stores, leaving more room for consumers who want to shop or speak to an expert, she said. When the new game consoles launched this month, customers could schedule a pickup time from the app, a popular option with customers and employees.

Customer shopping behavior will be permanently changed as a result of the pandemic in a way that’s “more digital” and puts customers “entirely in control to shop how they want,” said Barry. The workforce will evolve to be more flexible and employees will gain skills outside their primary job function, she said. Stores will “look different over time” in function, size “and possibly even quantity,” said Barry, but remain a "cornerstone" of company strategy.

The company added 90 locations to the 250 ship-from-store hub locations it piloted in September, Barry said, and all stores will continue to ship online orders. The hubs are positioned to ship much more volume and use dedicated labor to fulfill online orders. The locations required minimal capital investment because technology was in place; they were chosen due to available warehouse space and proximity to carrier partners. Best Buy expects the 340 locations will ship more than 70% of ship-from-store units in Q4. A hub model benefit is the retailer's ability to extend its online order cutoff to 8 p.m. for next day delivery, she said.

Best Buy is testing new hub-based store formats at four Minneapolis stores, where it whittled down the shopping area to 15,000 square feet from 27,000. The product assortment at those locations will be the same but merchandise SKU count reduced to focus on the most popular items, Barry said. Remodels will feature staging space for in-store pickup and to support ship-from-store transactions, she said. In one location, it’s using available space to increase the previous allocation to its Geek Squad business. Making such changes during the holiday season is an unusual move, she said, “but we feel it was imperative to move quickly” to learn how the new store format can complement the omnichannel strategy. Another pilot is testing placement of a covered curbside pickup area next to a store warehouse; it also includes pickup lockers.

Mobile phone sales were down, due largely to the late launch of the 12 series of iPhones, said Mohan. Demand for higher capacity 5G phones with larger screens is high. The replacement cycle for phones “has been forever changed,” he said. Best Buy’s role is to support customers looking for the latest mobile phone technology.

Best Buy shut down its Mexico operations in the quarter. The company incurred $111 million in restructuring charges as a result and $36 million in inventory markdowns. Fiscal 2020 revenue at Best Buy Mexico was $400 million, with slightly negative operating income, Bilunas said.