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Best Buy: Changing Focus, Competitive Advantage Could Yield High Returns

Retailer's refreshed strategy may catalyze its financial and stock price performance

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Robert Stephens, CFA
Aug 06, 2018
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The latest quarterly results from Best Buy Co. Inc. (

BBY, Financial) were ahead of market expectations. The retailer posted revenue of $9.1 billion, which was 6.8% higher than in the prior-year quarter. Comparable sales increased 7.1%, which was above the market's 3% forecast. International comparable sales moved 6.4% higher, with diluted earnings per share increasing 20% to 72 cents.

Despite a strong first quarter, the company maintained its guidance for the full year. For the second quarter, it expects to deliver revenue growth of 2.3%. Comparable store sales are projected to grow 3% to 4%, while earnings per share is expected to be 12% to 19% higher than in the same quarter last year.

Changing business

In the days following the release of its first-quarter results, Best Buy's stock price declined by as much as 10%. Since then, it has fully recovered so that it is now up 25% in the last year. This is above the 15% capital growth of the S&P 500 over the same period.

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The company’s future financial and stock price performance could be catalyzed by its move to provide support in the connected services space. It is estimated that at the end of 2017, 29 million homes in the U.S. had at least one connected device. In the last three years, this figure has grown at an annualized rate of 31% and is forecasted to grow at a fast pace in the future.

Many consumers, though, face installation challenges and troubleshooting issues. As a result, the company launched its In-Home Advisor program in 2017 and plans to ramp-up support for connected devices in the future. This could provide significant growth, with the technology being used in an increasing number and range of devices. Notably, it could be used in health care applications in order to allow adults to stay in their homes longer. Providing a service that helps consumers adapt to changing technology could provide the business with a sales boost, and may also help to diversify it away from physical product sales.

Competitive advantage

The retailer's recent decision to offer a tech support subscription service could help it to differentiate itself from rivals. For $199 per year, customers can access tech support for all of their electrical items and gadgets. Best Buy believes this could help customers maximize the capabilities of their products, while also helping to provide a stronger sense of customer loyalty. This could lead to cross-selling opportunities as well as margin growth potential.

So far, the company’s focus on differentiating itself from competitors seems to be working. Data from the YouGov BrandIndex survey suggests customer satisfaction levels have risen since the tech support subscription service was launched on May 21. Between its launch date and June 11, the company’s score rose from 38 to 47, representing its highest figure since the early part of 2015.

Best Buy also appears to have a competitive advantage over a number of its sector peers when it comes to its business model. There is an increasing amount of interplay between the different sales channels across the industry. The company has an ability to reach customers across multiple areas, such as online, in stores and in their homes. This could prove to be a unique competitive advantage that online retailers like Amazon (AMZN) do not enjoy.

Uncertainty

Despite reporting a positive first quarter overall, Best Buy’s online sales performance was relatively disappointing. Domestic online sales grew by 12%, which is down from the 22.5% growth recorded in the prior-year period. Its gross margin also recorded a decline of 30 basis points, falling to 23.3%. This was partly due to rate pressure in the mobile phones segment. The company’s maintenance of guidance for the full year despite a stronger-than-expected first quarter also caused uncertainty to build among investors regarding its future prospects.

The company’s online sales, though, did not include a benefit from gaming console and television launches, which was present in the first quarter of fiscal 2018. This provided a one-off boost to sales, which was not repeated in the first quarter of fiscal 2019, while the Samsung Galaxy S8 also launched in the first quarter of the year. The company is still gaining online market share, while the number of customers ordering online and collecting in store is also increasing. Best Buy is also investing heavily in its support offering, which could provide a growth catalyst if demand for physical products comes under pressure over the medium term.

Verdict

Best Buy’s future prospects appear to be bright. The company’s move into providing greater support for customers could improve its financial performance. Demand for such support is likely to rise as connected devices become more prevalent. The company may also benefit from a competitive advantage in its tech support offering, which has already contributed to improved customer satisfaction levels. Its ability to connect with customers online, in store and in homes could also offer an advantage versus rivals.

Although the company’s online sales growth disappointed in the first quarter and its outlook for the remainder of the year was cautious, its long-term investment prospects appear to be sound. Therefore, it could offer further capital gains in the future.

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