The Point Counter-Point Of Best Buy’s Spectacular 3rd Quarter

Best Buy’s figures for the third quarter are spectacular. Comparable store sales increased +23% and GAAP diluted earnings per share rose +34.5% to $1.48 from $1.10 a year ago. There was strong demand for product and services. The products management highlighted with especially strong sales were in computing, home theatre, and appliances. While mobile telephones (which really are another form of computer) lagged, it was mainly because of the late introduction of new phones that embrace the 5G networks.

Looking ahead to the fourth quarter, one has to keep in mind that the company started to promote heavily in October for holiday sales business. There are two schools of thought regarding how the fourth quarter will play out. Here are the scenarios:

1.    Positive outlook:             More customer spending will drive top line growth. Many Best Buy customers have some additional discretionary income that they could spend on a new widget. After all, many deferred a vacation or maybe a cruise trip, and they saved hotel and airline costs. And others have been saving money by doing less. In any case, now all of them may choose to enhance their home with a new home theatre, a personal computer or telephone. That group of customers can be a strong buying forced during the rest of the holiday buying season and keep sales growing.

2.   Negative Outlook:            Expenses and pandemic fears will challenge profitable growth. We know that the supply chain will be more expensive with surcharges announced by UPS and FedEx. In addition, management raised the minimum wage rate to $15 per hour at the beginning of the third quarter, incentivizing the team but raising the cost of operations. In addition, the company will be closed on Thanksgiving Day, which I believe is the right action by management, but it means one sales day less. There is also uncertainty how the post-Thanksgiving buying will play out. The customer may still be reluctant to go into stores during the pandemic.

There is no question that management has worked hard to get available merchandise into stores. While at the end of the second quarter, inventory was down by 26%, now it is down by just over 1%. But, not everything is available from manufacturers.

Internet sales have been important. Comparable on-line sales increased +173.7% versus an increase of +15% in the previous year. That accounted for 35% of total enterprise comparable store sales. Of course, management’s efforts for customers to pick up merchandise at store is easy and safe. It helped customers to shop in confidence.

Management under CEO Corie Barry is optimistic about the future of the company. Short term incentive compensation has been reinstated, the company has resumed the 401(k)-employer match, it continues to provide emergency funds to employees, and it made a $40 Million donation to the Best Buy Foundation. All these investments go a long way toward attracting and retaining good staff. The foundation donation will accelerate the progress toward Best Buy’s goal to reach 100 Teen Tech Centers across the United States. Management also announced that it would reinstate its share repurchasing program in the current fourth quarter.

In addition to those investments in the organization and its future stability, Best Buy provides cross training of store associates to assure good customer service.

It is refreshing to see that the pandemic has not overtaken the company, but rather management has been innovative and created new opportunities for growth.