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5 ways Best Buy just defied its critics

Best Buy
David Paul Morris | Bloomberg | Getty Images

Chalk another "win" in Best Buy's column.

Shares of the electronics chain rocketed 6.5 percent higher Thursday, after the company handily topped Wall Street's earnings and revenue forecasts, fueled by stronger-than-expected results from existing stores. The gains added to the stock's 2016 run, which has sent shares 44 percent higher year-to-date.

Best Buy's fiscal third-quarter performance served as yet another indication that the retailer, which many had written off as the next casualty to Amazon, has found a way to differentiate itself in an increasingly digital world.

And while the retailer remains cautious about the holiday quarter — a period when other bricks-and-mortar chains slash the price of televisions to bring traffic into their stores — Wall Street gave the company credit for managing its expenses and growing market share in the recently ended period.

Here are five ways Best Buy managed to do that.

Leaning into Amazon's strength

Best Buy's digital sales recorded their third straight quarterly increase of 24 percent — quite the feat for a company that was originally expected to be pummeled by the shift to online shopping. That growth rate topped the overall industry's 15.7 percent increase during the third quarter, according to the Commerce Department.

CFO Corie Barry attributed the increase to an uptick in digital traffic, higher average order value and the company's ability to turn more browsers into buyers. Best Buy has invested in ways to make its website easier to navigate and search; removed the complexity from the process of completing a transaction; and cut down on shipping times.

"Best Buy's third quarter of online growth... continues to validate the company's multi-channel transformation," said Moody's analyst Charlie O'Shea, speaking to the company's fusion of its digital and bricks-and-mortar businesses.

Encouraging shoppers to put more in their carts

Deflation is a chronic challenge in Best Buy's business. As soon as a technology becomes more widely adopted, additional competitors enter the fray — and the retailer loses some of its edge and pricing power.

To help combat this issue, as well as an industry-wide slowdown in foot traffic, Best Buy is doing a better job up-selling customers on complementary purchases, such as streaming devices and audio equipment.

The transition to thinner TVs has made sound equipment a natural add-on, as these models tend to have lower sound quality, Barry said.

"It's not only what were doing," she said. "This continued evolution lends itself to a more complete experience."

Getting mobile back on track

Sales of mobile devices picked up during the quarter, despite an estimated $60 million hit from the recall of Samsung's Galaxy Note7.

The category, which combined with computing accounts for half of Best Buy's domestic sales, grew 1.6 percent on a comparable basis from last year. That rate of growth marked an acceleration from the second quarter, and was helped by sales of Apple's new iPhone.

The Samsung recall is seen taking a $200 million bite out of Best Buy's fourth-quarter sales, as shoppers have been reluctant to switch to a different option.

"Customers are not rushing to buy something else at this point in time," CEO Hubert Joly said.

Telling shoppers to play around

Best Buy has embraced the very phenomenon that was once seen as its biggest threat: showrooming. By leaning on its branded shop-in-shops and holding 300,000 virtual reality demonstrations since the technology's launch, it's positioned its store base as a place where shoppers can test and learn.

That doesn't mean the company will blindly move forward with its store fleet. The closure of 14 traditional locations and 23 mobile stores from the prior year dampened the retailer's domestic revenue during the quarter, though that metric still turned out a 1.3 percent gain.

Becoming more efficient

Cutting costs out of Best Buy's business has been one of Joly's biggest priorities since he arrived four years ago. The company made further strides with these measures during the latest three-month period, and has recorded $300 million in annual cost reductions so far this year. By the end of the fourth quarter, that number is expected to grow to $400 million.

"This is a good outcome given the increased multichannel complexity of the business," said Hakon Helgesen, a retail analyst at Conlumino research firm. "However, we would also caution that this is an area where Best Buy will need to maintain its progress if it is to keep on track in terms of profitability."