There's more to Best Buy's earnings surprise than tax refund checks

Key Points
  • Best Buy reported unexpected growth of 1.6 percent at its established locations for the first quarter.
  • Meanwhile, analysts are also keeping an eye on Best Buy's e-commerce platform to see how it can match up with that of Amazon.
  • Best Buy delivered digital sales growth of more than 22 percent during the latest period, as it invests more in this area of its business.
Analyst: Best Buy has truly embraced e-commerce to fight Amazon
Analyst: Best Buy has truly embraced e-commerce to fight Amazon

An unexpected surge of shoppers spending their tax refunds on electronics helped boost Best Buy to a first-quarter earnings surprise, but sustaining that momentum in the current retail environment will be anything but easy.

Best Buy showed signs in the latest quarter that it has the right formula to go up against Amazon, as more shoppers ring up their purchases online.

Best Buy shares were up nearly 19 percent Thursday afternoon, reaching an all-time intraday high of $60.14.

The electronics retailer had warned in March that same-store sales could fall by 1 to 2 percent during the latest period, but on Thursday Best Buy reported growth of 1.6 percent at its established locations. Analysts were expecting a 1.5 percent decline, according to Thomson Reuters estimates.

The company's CEO, Hubert Joly, said the increase in sales benefited from the anticipated arrival of delayed federal tax refund checks, with more consumers picking up gaming and mobile products.

"We delivered a strong performance in gaming due to robust customer demand and good product allocations for the new hardware that launched during the quarter," Joly said on Thursday's earnings conference call.

"Second... while mobile was not a growth area due to last year's product recall and the fact that new phones launched later in the quarter than they did last year, sales in [the first] quarter were better than we expected as new unlimited data plan offers from the carriers generated increased demand across devices."

The 1,400-store chain also benefits from selling higher-margin electronics and appliances at a time that traditional appliance sellers like Sears Holdings Corp. are struggling

Best Buy added that it now expects second-quarter comparable sales to grow between 1.5 percent and 2.5 percent.

"There is little doubt that the delayed arrival of tax refunds provided buoyancy to the [electronics] market later into this quarter," GlobalData Retail managing director Neil Saunders wrote in an email.

Nevertheless, "the impact was helpful but somewhat limited," Saunders said. "Best Buy's performance is down to more than just consumers temporarily having a bit more money to spend."

Like most retailers, Best Buy has been facing stiff competition from the likes of Amazon, as more consumers shop online, where they can do their homework on pricing. Many have feared Best Buy would fall victim to showrooming, where shoppers touch and feel products at a store, only to seal the final deal online.

Saunders said he has been encouraged by steps Best Buy is taking to deliver growth both in its store and online.

"Foremost among these is a view that sales of newer consumer technologies, like smart home, can be stimulated with good customer service, advice, and demonstrations," Saunders said. "From our data, we see that there is an appetite among consumers to know more about this sort of technology, and we believe Best Buy is in an ideal position to inform and engage."

During the first quarter, Best Buy delivered digital sales growth of more than 22 percent.

Notably, Best Buy is acknowledging that the retail landscape is shifting. As the company allocates more revenues toward its online channel, Best Buy said it's considering the "ongoing optimization of [its] store footprints."

"As you see the online business grow and you see the customer demands around speed and choice continued to evolve, we do believe that over time, we need to continue to invest and make sure that we're delivering in the ways that our customers want," CEO Joly said on the call with analysts and investors.

The retailer has outlined the next phases of its so-called turnaround efforts, which include increasing its in-home advisory program, accelerating growth in Canada and Mexico, and finding more ways to cut costs.

Best Buy has had Geek Squad agents and members of its Magnolia Design Centers team going to customers' homes for years — essentially receiving a free visit from an in-home adviser — to help with computing and home theater issues, the company said.

"There is no revenue associated with an in-home adviser visit specifically," Joly explained. "Remember this is a free visit from an in-home adviser who's going to come and help you... The revenue comes from what you would choose to purchase as a result of that visit, be it hardware or services."

Additionally, Best Buy is matching competitive online prices in its stores, renting portions of its floor space to Samsung and Microsoft, ditching an overseas expansion strategy and instead focusing on selling higher-margin electronics and appliances, at a time when department store chains like Sears are struggling.

"Q1 continued the trend of Best Buy enhancing its competitive position," Moody's lead retail analyst Charlie O'Shea wrote in a note to clients.

"Potential performance pressure points were evident during the quarter, including delays in income tax refunds and hhgregg's bankruptcy and still-ongoing liquidation; however, Best Buy successfully avoided the trap of chasing low quality/margin sales," he said.

Best Buy's net income fell to $188 million, or 60 cents per share, in the latest quarter, from $229 million, or 70 cents a share, a year earlier. Analysts were expecting earnings of 40 cents per share, according to Thomson Reuters consensus estimates.

The retailer's revenue climbed 1 percent, to $8.53 billion, beating the average analysts' forecast for $8.28 billion.

"I think what Best Buy has figured out is where the store actually makes sense," versus putting consumer electronics online, Oppenheimer retail analyst Brian Nagel told CNBC on Thursday.

Best Buy has "figured out where to play" against e-commerce giant Amazon, making it a good example of a traditional retailer "really embracing online commerce," he added.

As of Wednesday's close, shares of Best Buy have climbed an eye-popping 57 percent over the past 12 months and are up about 18 percent for the year-to-date period.

BBY year-to-date performance 

Source: FactSet