Mass Retailer

Eye on Retail: Best Buy smart in pivoting to new areas

The first quarter was always going to be a tough one for Best Buy, not least because of the high comparatives from the prior year when tax cuts and bonuses allowed shoppers to engage in a mini-spending spree on electronics. In contrast, there was no such fillip to consumer finances this year. If anything, modestly lower tax refunds and higher domestic expenses moderated demand for big-ticket items. On top of this, the technology pipeline has been fairly weak with a lack of any big-hitter mobile and computing devices.

This challenging backdrop is one of the reasons why sales growth came out at a modest 0.8% on a domestic basis. The number for the core business is actually somewhat worse than this as the revenue figures include a contribution from GreatCall, the connected health company that Best Buy acquired in the third quarter of last year. Comparable sales rose by a healthier 1.1%, largely because they don’t take into account the closure of a raft of Best Buy Mobile stores and a handful of larger format shops.

When put in context, the results from Best Buy are, in our view, solid. The leveling-off of growth is more a function of the direction of the market than of any strategic misstep by the company. And in categories, such as wearables and connected home, where there are higher levels of consumer interest, performance was better. In essence, Best Buy is still a highly relevant retailer than is holding its own against the competition.

Given its reliance on technology companies to develop compelling products, Best Buy’s future performance will always, at least in part, be subject to factors outside of its control. On this front we do not believe the outlook is good. Too many of the mainstream consumer technology firms are focusing on incremental improvements which are inconsequential to consumers and unlikely to generate significant interest. Against this backdrop, Best Buy needs to pull out all the stops to secure the little growth that is generated, as well as pivoting to parts of the market that offer better prospects. Fortunately, we are optimistic about the company’s ability to do both of these things.

Best Buy has also been quick to pivot to new areas. Stores have strong offerings of growth categories like wearables and smart home and offer a high standard of customer service to help guide consumers through the various offerings. This is helping to take the edge off the declines in more traditional segments like mobile devices. However, Best Buy is also thinking beyond products by moving into technology services. This is a major part of the company’s future plans and it increases our optimism for medium to longer-term performance.

At the heart of Best Buy’s strategy is a view that it can use its assets to help enrich people’s lives through technology — and this goes beyond selling them products. In light of this, the recent acquisition of GreatCall is a logical evolution. It gives Best Buy a relevant service, driven by technology, that it can offer to consumers. In our view, it also helps counterbalance the pressure on both sales growth and margins of electronics products.

Overall, despite some of the negative headwinds in the consumer economy and the electronics sector, we remain positive about Best Buy’s prospects. The company is well managed and run and has a clear vision around how it will connect with and sell to consumers over the next few years.


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