There's no question that the retail industry is being upended by Amazon.com. But that doesn't mean that a company with the right strategy and the right leadership can't go toe-to-toe with the e-commerce giant. Consumer electronics retailer Best Buy (BBY -1.78%) has transformed over the past four years from a company in distress to a force to be reckoned with. It's third-quarter results paint a picture of a retailer that has figured out how to thrive in the age of e-commerce.
"Death by Amazon" no more
Despite the struggle by many retailers to attract shoppers to their stores, Best Buy isn't having much trouble. Comparable sales jumped 1.8% during the third quarter, well above the company's guidance calling for 1% growth, and an acceleration compared to the 0.8% growth posted during the third quarter of last year.
Consumer electronics, which accounted for 31% of Best Buy's revenue, grew comparable sales by 4.9%. Computing and mobile phones, representing 49% of revenue, posted a 1.6% increase in comparable sales. This growth is occurring in a difficult environment, making it all the more impressive. The NPD Group estimates that industrywide consumer electronics sales dropped 3.1% during the third quarter.
One factor driving Best Buy's sales higher is the company's e-commerce business. Online sales soared 24.1% year over year during the third quarter, an acceleration compared to the 18.3% growth reported during the same period last year. Increased traffic, higher average order values, and higher conversion rates were responsible for the increase.
Best Buy began fulfilling online orders directly from its stores a few years ago, a move that increased the online availability of merchandise and sped up shipping times. Becoming more competitive on price has also helped jump-start growth, as has implementing a price-match policy online. During the third quarter, online sales accounted for 10.8% of domestic revenue, up from 8.8% during the prior-year period.
Even with online sales accounting for a larger portion of Best Buy's business, the company still managed to increase its gross margin during the quarter. Domestic gross margin jumped 60 basis points year over year, to 24.7%, with strength in home theater and computing more than offsetting weakness in mobile devices.
Best Buy continued to keep costs in check, as well, with selling, general, and administrative expenses rising just 0.85% year over year. This helped Best Buy boost its operating margin to 3.5%, up from 2.6% during the third quarter of last year. Non-GAAP EPS soared 51% year over year, to $0.62, driven by this higher margin and a slightly lower tax rate.
"We are pleased to report today growth on both our top and bottom lines," said Best Buy Chairman and CEO Hubert Joly. "We are excited by the continued product innovation we are seeing, the role we play for customers, the growth opportunities in front of us, the quality of our execution, and the strength of our financial performance."
Just like last year, Best Buy is offering customers free shipping on all online orders during the holidays, with no minimums. This should help keep the company's online momentum going. During the fourth quarter of last year, non-GAAP gross and operating margins actually increased year over year despite the free-shipping policy.
Best Buy expects comparable-sales growth during the fourth quarter in the range of -1% to 1%, reflecting an expected $200 million negative revenue impact from product recalls, most notably the Galaxy Note 7. Despite this challenge, the company expects non-GAAP earnings per share to come in between $1.62 and $1.67, up from $1.53 during the prior-year period.
With strong comparable-sales growth, accelerating online-sales growth, and soaring profits, it's becoming more difficult to toss Best Buy into the group of retailers most susceptible to the continued rise of Amazon. Given these results, it's time to stop doubting Best Buy.