Best Buy Surprises With 37% Q1 Comparable Sales Increase

Stimulus spending, the sustained role of technology and the ongoing shift to hybrid work models caused unexpected gains in Best Buy’s comparable sales for fiscal Q1 ended May 2, said CEO Corie Barry on a Thursday earnings call. Comparable sales grew 37% from a year earlier, led by home theater, computing and appliances.

“The year has clearly started out much stronger than we originally expected,” said Barry. Momentum continued into Q2, leading Best Buy to raise its outlook to 3%-6% comp sales growth, vs. the previous forecast of minus 2% to plus 1% growth. Fiscal Q2 ends early August. But concerns over consumers’ return to spending on travel and dining out prompted Best Buy to maintain a conservative line toward second-half performance. Shopping behavior “will continue to evolve” in 2021's Q3 and Q4, said Barry. Best Buy is uncertain how that will affect performance later in 2021, “especially as we lap particularly strong sales in the back half of last year,” she said. The stock closed 1% higher Thursday at $118.14.

Product availability constraints continued in the quarter in large appliances, computing, TV and gaming, said Barry. Q1 results showed the “strength of our supply chain,” she said. Best Buy moved the volume of inventory necessary to drive 37% comp sales growth “while navigating record demand across retail, container shortages and port congestion,” she said.

Since the beginning of the COVID-19 pandemic, Best Buy has had “at least some spotty inventory shortages,” said Barry. “Pockets” of shortages should persist through the rest of the year, she said. Days of inventory on hand are improving, but appliances, computers, TVs and gaming are strained, she said. Limits on raw materials and production capacity are to blame, as are chip shortages, port and container disruptions, and global consumer demand that's spiking at “sustained, unprecedented” levels, she said.

Best Buy is able to navigate some disruptions through its “high degree of transferability,” Barry said. As a specialty CE retailer, it can deliver a “variety of products that might meet your needs.” For a customer looking for a TV that’s not in stock, an associate would steer her to another in the same screen size, for instance, that would fit her requirements, Barry said.

Same-day delivery to customers’ homes was up 90% year on year, said the executive. Online sales were 33% of domestic revenue vs. 15% two years ago but down 42% from last year. Installations, delivery and in-store and in-home repair volume returned to pre-pandemic levels and were higher than fiscal Q1 2019, said Barry. Customers across age groups are feeling more comfortable shopping in stores, she said.

Barry called the move to hybrid work and learning models “permanent structural shifts,” along with streaming entertainment and a “sustained focus on the home.” The increased penetration of consumer electronics “presents opportunity as we grow our consultative in-home model and help our customers optimize the potential of their technology.”

Many customers are in a better financial position with more savings and stronger credit since the beginning of the pandemic, the job market is favorable and higher vaccination levels have lowered COVID-19 infection rates -- all positive for Best Buy, Barry noted. The retailer believes the nesting trend will continue, driving demand for products and services that improve the home experience. Inventory constraints in areas like gaming indicate “sustained demand” in the category, Barry said.

Barry sees opportunities in the installed base of customers who haven’t upgraded their tech gear, citing NPD figures saying 15% of the TV installed base upgraded more quickly than expected during the pandemic. Low-penetration categories including health, fitness and small appliances have “room for growth.”

The retailer has seen a 50% upswing in new customers since the pandemic began, with gains in female, millennial and lower-income customers, said Barry. It’s retaining new customers at rates similar to its existing base, she said.

Best Buy's membership program was paused at the beginning of the pandemic, Barry noted; it began piloting a new program, Best Buy Beta, last month in 60 stores. Beta combines benefits from Total Tech Support, the My Best Buy loyalty program and the Best Buy credit card. The $199 annual membership “is not in direct competition” with Amazon Prime, Walmart+ or other loyalty programs, said Barry, ticking off features including exclusive member pricing, unlimited Geek Squad tech support, two-year warranties, free delivery on all products and free installation on most products and appliances.

The Best Buy distribution model now has various fulfillment touch points with customers: vending machines, lockers, alternate pickup locations, curbside, in-store, same-day, next-day and ship from store. The options give Best Buy “flexibility to deliver with speed ... convenience to the customer,” Barry said.

In-store employees are supporting next-day deliveries, and the retailer is looking at ways to leverage its “permission from customers to get across the threshold,” said Chief Operating Officer Mike Mohan. “Today, it’s ring a doorbell and drop it on the step, but I think you can pull on the string a little bit, and you have the ability to get in someone’s home, have a conversation, set up a profile, maybe even have a discussion around membership, and potentially get them set up with an adviser.”

Best Buy is testing distribution models for seamless interaction between physical and digital shopping, said Barry. It’s looking at how it can best deploy employees in flexible ways to meet customer expectations. Late last year, it launched a pilot program in Houston to test a “much more experiential store,” said Barry, describing PC gaming, headphone and fitness areas and remodeled premium home theater and appliance spaces, along with a bigger Geek Squad presence. It reorientated the location of the store’s warehouse, putting it next to a covered drive-up area for curbside pickup and lockers. Early test results show higher net promoter scores and sales vs. control stores.

In Minneapolis, where it’s testing four stores as primary fulfillment hubs, the retailer cut back on shoppable square footage, allotting space for “aging products,” in-store pickup and ship-from-store transactions, Barry said. The sales floor still has primary categories, but the merchandise SKU count is reduced to focus on the most popular items. The stores have fewer staffers, and it’s testing a queue process for customers who want to consult with an employee, she said. Goals are to retain customers and boost customer satisfaction, while reducing selling square footage, improving speed and convenience, and operating more efficiently.

Later this year, Best Buy will pilot a portfolio approach where it will leverage assets in stores, fulfillment, services, an outlet, lockers, the digital app and in-store and in-home consultants. It will test different prototypes in 15,000-, 25,000- and 35,000-square-foot stores, a new outlet store and smaller 5,000-square-foot spaces, Barry said. It believes it can operate more efficiently by reducing retail square footage and open-box costs -- and by streamlining repair and tech capability. It plans to consolidate ship-from-store units in a limited number of stores. The retailer is trying to achieve the right mix distribution facilities and touch points to meet customer expectations, said Barry. “When about 60% of what we sell is either being picked up in a store or shipped from a store, that in-store capability is incredibly important to the customer experience.”

Best Buy's domestic revenue of $10.8 billion was up 37% year on year in the quarter, driven by 38% comp sales growth. Gains were offset by loss of revenue from permanent store closures in the past year.