Best Buy Continues Focus on Relationship Programs Amid Modest CE Growth
Best Buy shares closed up 14 percent to $68.82 Wednesday after a better-than-expected fiscal Q4 earnings report showing a 3 percent year-over-year hike in comparable sales. Enterprise revenue was $14.8 billion over 13 weeks vs. $15.3 billion in a 14-week year-ago quarter. Domestic comp sales grew 3 percent. A 3.5 percent revenue decrease to $13.5 billion was driven by the lost week and closing 257 Best Buy Mobile and 12 large-format stores over the year, said Chief Financial Officer Corie Barry. She estimated the extra week last year brought in $760 million in sales.
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Wearables, major and small appliances, smart home and gaming drove sales growth, offsetting declines in mobile phones, said Barry. Domestic online revenue of $2.96 billion was 21.9 percent of domestic revenue, vs. 20 percent last year. Domestic online sales growth was 9.3 percent vs. 17.9 percent a year ago, driven by improved conversion and higher traffic, she said.
Management focused on building customer relationships through the In-Home Advisor and Total Tech Support programs, as CE industry hardware sales gains remain modest. The CE industry hardware sales forecast is flat to “up slightly,” including gaming, phones and appliance categories, said Barry. “We don’t see anything in front of us that says the trajectory of the industry massively changes,” she said: Best Buy could have “slight share gains.”
It historically has focused on “transactions and selling products” and is transitioning to selling solutions and building relationships requiring new performance indicators different from basket size and close rates, said CEO Hubert Joly. Performance indicators of a customer service-oriented retailer include whether consumers are existing customers and the retailer’s share of a local market, he said.
Analytics have shown customers use Total Tech Support more at the beginning of a contract, and the retailer is working to get more consistent usage over the life of service agreements, said Barry. On whether there’s a risk of losing renewals because of customers’ tendency to front-load support, Joly said renewal rates are in line with expectations. He said Best Buy is investing to create “stickier” relationships through more self-service capability and proactive support that suggests customers update firmware, “clean up a computer” or get advice on parental controls and security.
The retailer hopes to improve revenue by expanding the lease-to-own business it has been testing to reach shoppers who otherwise wouldn’t be customers, Barry said. On risks consumers with poor credit and those with no established credit could be, she said less than 1 percent of customers “go delinquent” on their financing agreements, but the company doesn’t bear the risks on those arrangements: The market “makes a ton of sense for us; we want to serve widest swath of customers we can.”
Commenting on the expected effects of fewer and reduced tax refunds this year, Barry compared the situation to two years ago when Q1 had a slowdown in tax refunds. Most of that business returned as the quantity of refunds evened out over the quarter, she said. She put a positive spin on this year's tax situation, saying consumers will have higher take-home pay, calling it a “timing question throughout the year.” The company factored lower tax refunds into Q1 guidance, she said.
On the impact of U.S. tariffs on certain imported electronics from China, Barry said the $200 billion list that took effect in September touches about 7 percent, $2.3 billion, of Best Buy's total cost of goods sold. The FY 2020 outlook assumes tariffs remain at the 10 percent rate, she said. Enterprise revenue guidance for Q1 is $9.05 billion-$9.15 billion with comparable sales growth of flat to 1 percent.
Addressing the economy, Joly cited a Bloomberg forecast consumer spending will increase 2.7 percent in 2019, similar to 2018 levels, and by 2.1 percent in 2020. Technologies expected to drive consumer spending over the next few years include 4K, 8K, OLED and large-screen TVs; wireless power; security and accessibility; foldable phones; and 5G, which could unlock “very interesting use cases,” Joly said. He sees significant opportunity in smart home, expected to triple in retail revenue in the U.S. by 2025. Digital health is also a key opportunity for Best Buy, he said.
Responding to a question on expanded Apple distribution in Best Buy stores, Joly said the retailer has 900 Apple stores-within-stores and 3,000 Apple experts. He called Best Buy the largest reseller of Apple Care contracts.
On whether Best Buy views the smartphone business as in “perpetual decline,” Barry cited the maturation of the mobile cycle, now extending as phones become more expensive. Declines in the phone category aren't about share but about how often people are buying “pretty spendy phones and replacing them.”
Mike Mohan, chief operating officer, downplayed the idea of 5G and foldable phones reviving Best Buy’s cellular business near term, citing “limited appeal” from a buying standpoint because of early market pricing. They will produce a high interest level from consumers, and Best Buy will showcase the technologies, including in home adviser visits, to “show people what they can do.”