Best Buy Raises Guidance as Purchase Intentions Remain High

Coming off a record Q2, Best Buy upgraded its sales outlook for the rest of fiscal 2022 ending late January, raising its sales outlook to “flat to down 3%” from a “high single-digit decline” from a strong second half in FY 2021. The retailer posted record sales of $11.8 billion for the quarter ended July 31, with comparable sales growth of 20% on strong demand for computing, appliances, gaming, virtual reality and home theater. It had Q2 declines in headphone and mobile phone sales. The stock closed 8.4% higher Tuesday at $121.49.

“We definitely are seeing more penetration of consumer electronics,” due largely to customers having CE products in multiple locations, said CEO Corie Barry on a Tuesday earnings call. Hybrid work trends resulting from the COVID-19 pandemic have translated to multiple purchases within the same category. “I might have one setup at home, one setup at work and I might even have one setup for on the go,” she said, resulting in a “deeper penetration than ever into people’s homes and lives.” Best Buy now serves a “a much larger” installed base of consumer electronics, with customers who “have an elevated appetite to upgrade due to constant technology innovation and needs that reflect permanent life changes, like hybrid work and streaming entertainment content,” Barry said.

Promotionality is picking up, said Chief Financial Officer Matt Bilunas, saying it’s higher than a year ago, but lower than in 2019. “We are always going to be very aware of what our competitors are doing in the back half, whether it’s back to school or the holiday season,” and will “adjust appropriately.” Best Buy is seeing some inflation as well with increases being passed on to consumers in some cases, such as appliances, he said. Bilunas doesn’t expect inflation to have a significant impact on pricing in the second half. Barry added: “Our priority is always to be priced competitively, and that will be the case no matter what’s coming through the costing side of things.” She expects the holiday season to be more promotional than the rest of the year.

By category, gaming could be strong in the second half, depending on the level of inventory that comes in, said Bilunas, along with home theater and appliances. He expects slower sales of computers due to the “immense demand” the category has had since the pandemic began.

Bilunas cited the typical seasonal strains on inventory in Q4 and said Best Buy is still having “pockets of constraint” now due to supply chain disruptions. Best Buy is in a “healthy inventory position” for the holiday quarter, and would “clearly like to have more in certain areas, but we have a high degree of transferability between categories and within category assortment to meet customers’ demand," he said.

Barry gave a peek into a few new pilot programs. It began implementing a pilot for its new “holistic market approach” in Charlotte that’s designed to leverage all Best Buy assets including stores, fulfillment, services, an outlet, lockers, the digital app and in-home and in-store consultation labor. It will also test prototypes of remodels in 15,000-, 25,000- and 35,000-square-foot stores, plus a new 5,000-square-foot concept. The pilots will span several quarters, Barry said.

Prior to holiday season, Best Buy is piloting a virtual store that will operate within a physical store layout housed in a distribution center. The store will have merchandising and products and be staffed by dedicated employees, including “vendor-provided expert labor,” but will have “no physical customers,” Barry said. “Instead, customers can interact with our experts via chat, audio, video and screen-sharing depending on their preference.” They will be able to see live demonstrations, displays and physical products. A customer could be on Bestbuy.com, click on a product and be connected via video to a “Blue Shirt in the Best Buy virtual store and never leave your living room.” Customers in a store can scan a bar code and be taken via their phones directly to the virtual store where an associate can answer questions, she said.

Best Buy is converting one store to a new type of outlet. Its existing 15 outlet stores focus on large appliance and TV open-box products; the new outlet will have open-box products from all categories and be the hub in a new repair and service “hub-and-spoke" model, Barry said. It will also have an auto tech hub for installations. In four Minneapolis test stores, Best Buy cut the square footage to 15,000 to provide more space for fulfillment, and added signage, small appliances and printing supplies.

Best Buy is consolidating ship-from-store operations in a limited number of stores across the country, said Barry. It’s using fewer stores than last year as hubs and has begun remodeling 13 stores to deliver a higher proportion of volume for online orders. They're expected to be ready by the holiday season, taking on about 25% of the national ship-from-store volume, she said.

Management had guided to lower second-half sales, expecting to lose some wallet share as consumers increased spending on entertainment and travel, which were put on hold during early stages of the pandemic. That shift “happened slower than what we thought,” said Barry. “For a while, we were seeing growth in both,” she said, as consumers used stimulus money and savings to increase discretionary spending. As the pandemic has “redoubled its effort,” management has again seen a shift away from spending on experiences. That shift will happen at some point, though “it’s being pushed out a bit,” she said.

But systemic changes born of the pandemic will persist, said Barry. Hybrid work models are likely "a new way of working going forward.” Also, streaming, and the amount of streaming content, isn’t an “in the moment change,” she said. “That is a change in how people will consume content going forward.” She also noted consumer savings rates are at an all-time high, and they have “healthy balance sheets” and “access to credit.” That’s helping to “buoy demand across both experiences and retail.”

In an update on the transition from the Total Tech Support membership program to Best Buy Beta, currently in test, Barry said the program continues to evolve based on member feedback. Best Buy began testing the Beta program at the beginning of the fiscal year in February and is having better-than-expected uptake in the $199 annual program, which includes unlimited Geek Squad technical support on all technology in consumers’ homes “no matter where or when they purchased it.” It includes 24/7 access to phone and chat teams available only to members. It also includes up to 24 months product protection on most purchases from Best Buy, free delivery and standard installation, exclusive pricing, a 60-day return window and free shipping of online orders.

Response has been better than expected. Barry credited the success to a combination of features that’s making customers go to the retailer more frequently and spend more each time, making them “very sticky to the Best Buy brand.” It plans to roll out the new program at the end of October. Barry expects membership for the Beta program to grow faster than the predecessor Total Tech Support. “We will keep iterating on the offers,” she said, “depending on what it is that customers really value” and what keeps them loyal to the brand.

Tech companies will continue to innovate in a way that inspires customers to upgrade at a faster pace, Barry said, saying replacement cycles will shorten as new capabilities become available. She referenced the evolution of tracking technology in cameras in computers and tablets over the past year as videoconferencing has become an integral part of the hybrid work model. Survey data shows consumers’ intent to purchase remains high over the next 12 months, which says to the retailer people are thinking about add-ons or upgrades to help them through another year of on-and-off at-home schooling, she said.

Domestic revenue of $15.4 billion increased 11.2% over last year. The increase was primarily driven by comparable sales growth of 12.4%, partially offset by the loss of revenue from permanent store closures in the past year, said the company. Domestic online revenue of $6.7 billion grew 89% on a comparable basis, and as a percentage of total domestic revenue, online revenue increased to 43.2% versus 25.4% last year, said the company.