Best Buy Eyes Possible Q4 Comp Sales Decline, Gaming Constraints

Best Buy’s domestic revenue edged ahead 1.2% to $11.9 billion in Q3 of fiscal 2022 on 2% comparable sales growth, riding strength in appliances, home theater and mobile phones, said CEO Corie Barry on an earnings call Tuesday. Domestic online comparable sales fell 10.1% for the quarter ended Oct. 31 vs. a gain of 173.7% in the year-earlier COVID-19-affected quarter, said the company.

Gross profit rate in the U.S. business was 23.4% vs. 24% a year ago on lower product margin rates, driven by low promotional activity, product damages and returns and lower inventories, said Chief Financial Officer Matt Bilunas. Q4 guidance calls for revenue of $16.4 billion-$16.9 billion and comp sales of a -2% drop to 1% increase, said Bilunas. For fiscal '22, the company raised revenue guidance to $51.8 billion-$52.3 billion from $51 billion-$52 billion. Shares plunged 12.3% Tuesday to close at $121.01.

Barry called out product theft as a rising concern. “Across retail, we are definitely seeing more and more, particularly organized, retail crime,” she said, along with “incidents of shrink in our locations.” Best Buy’s priority is employee safety, “whether that’s the pandemic, whether that’s unruly customers, whether that is outright theft, which is a great deal of what we’re seeing right now,” she said.

Measures Best Buy is taking to protect employees and customers include locking up product while trying to still have a good customer experience, hiring security personnel in certain locations, and working with vendors on “creative ways we can stage the product.” It’s also working with trade organizations. In addition to having a financial impact, the crimes are “traumatizing” for employees, and the company is “doing everything we can” to create as safe an environment as possible, Barry said.

On holiday inventory, Barry said product availability continues to improve despite “pockets of constraints” in appliances, gaming and mobile phones. “While we have faced, and continue to face, supply chain challenges, including delays and higher costs, we are proactively navigating a situation that we have been dealing with for several quarters,” she said. She credited operations teams for “strategic sourcing and inventory decisions” made early in the year “to set us up well heading into the holiday.”

To manage shortages in a “constantly evolving environment,” stores are “pulling up product flow, adjusting store assortment based on availability and acquiring additional alternative transportation,” Barry said. Best Buy entered Q4 with 15% more inventory than a year ago and is “confident” it can meet customer demand through the holiday season, she said. Best Buy partnered with a "diversified set of delivery partners" and is also using its employee delivery capability in over 400 stores; almost 60% of customers live within 10 miles of a delivery location, she said.

Online revenue was 31% of domestic revenue in Q3, growing by $2 billion, vs. 16% of revenue in the year-ago quarter, Barry said. Customers are returning to stores and interacting digitally via phone and chat at “much higher rates” than pre-pandemic, she said. Some 31% of customers bought online and picked up in store in the last year, said Barry, underscoring the retailer’s omnichannel strategy.

Best Buy has started leveraging vendor relationships with its buy online, pick up in store service, Barry said. Customers buying select products at Samsung.com have the option to pick up the products at their local Best Buy store, she said. Also, customers buying Insignia, Toshiba and Pioneer Fire TVs on Amazon.com can pick up those TVs at a local Best Buy store, she said.

The retailer uses its “considerable supply chain expertise” to transport some vendors’ products “often from the country of origin to our distribution centers,” Barry said. It allows Best Buy to increase its visibility into incoming inventory and “garner greater scale,” she said.

Gross margin rates in Q3 were affected by lower services margin rates including rate pressure from Best Buy’s $199 Totaltech membership program, which has “incremental customer benefits” vs. the previous Total Tech Support program, said Bilunas. Totaltech is putting “short-term pressure” on the gross margin rate, but the program's goal is to “drive more product sales,” said Bilunas: “That will take a little bit of time” as the program ramps. It will “help offset some of the pressure you see from the cannibalization of the services business.” Supply chain transportation costs grew in the October quarter, but they were offset by lower parcel expense since the mix of online sales was lower in the quarter vs. the prior year, Bilunas said.

On holiday season promotional activity, Bilunas said it’s on the upswing, especially in areas where inventory is “freeing up,” such as computing. The retailer will be more competitive than last year when the pandemic affected supply; the quarter will be less promotional than two years ago, he said. Next year, as inventory frees up, promotions will increase in categories "one at a time.”

Barry updated Best Buy’s progress with pilot programs it’s using to “build a framework” to move the retailer from a focus on stores to a “true omnichannel one” with equal attention to the different ways customers shop at Best Buy. She highlighted a virtual store concept the retailer is piloting using a physical store it built in a distribution center with merchandising and products, staffed by store associates, including “vendor-provided expert labor.” Customers interact via chat, audio, video and screen-sharing depending on their preference; they can see live demonstrations, displays and physical products, she said. Initial results show higher conversion rates and higher average order value than with typical chat interactions.

A pilot in Charlotte is designed to leverage all the retailer’s assets in a portfolio strategy across stores, fulfillment, services, an outlet, lockers, a digital lab and in-store and in-home consultation labor, Barry said. The new outlet features all product categories and has a services hub model. In Houston, Best Buy is seeing “strong results” from an experiential store pilot and plans to roll out aspects to stores across the country next year.

Best Buy is also experimenting with labor models to address customers’ changing shopping behaviors, Barry said. That includes using technology in stores that don’t have as much labor and developing a more “flexible” work force that can provide expert help across product categories -- in store and virtually -- and “flex into” other jobs such as curbside fulfillment. It allows employees to pick up shifts at other stores or distribution centers, said Barry.

Customer shopping behaviors have changed and continue to evolve, Barry said, sometimes week to week. Curbside pickup will become more important as Christmas approaches, she said. With a more flexible model, she said, “I can move employees, and employees can opt in to being moved to different areas in the store” where they can pick up more hours, and potentially, more flexible hours.

Best Buy is still seeing a number of employees calling in sick, and a flexible labor model allows the company to cover for employee sick days, Barry said. The flex model is “not just about hiring and retention; it’s about how can I move the labor around the store in the most flexible way.”