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Best Buy Breaks Down Another Strong Quarter

By Demitri Kalogeropoulos – Dec 3, 2019 at 11:40AM

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The retailer has solid momentum heading into the holiday season.

Best Buy (BBY -0.46%) recently surprised investors by lifting its growth and earnings outlook just a few days before the start of the peak holiday shopping season. The retailer cited strong demand trends in areas like appliances and services, which more than offset pressures brought on by increased tariff costs.

In a conference call with Wall Street analysts, CEO Corie Barry and her team broke down the main elements they see supporting their more optimistic reading of the business even as competition heats up over those free-spending holiday shoppers.

Let's look at some highlights from that presentation.

A man and a woman shop for a new TV in an electronics store.

Image source: Getty Images.

Breaking down the growth

The largest sales growth drivers were appliances, headphones, tablets, and computing. These drivers were partially offset by declines in our gaming and home theater categories. In addition, comparable sales in the services category increased 12.9%. -- CFO Matt Bilunas

Best Buy's 1.7% comparable-store sales growth beat management's forecast to mark a welcome change from the prior quarter's slight miss. The standout sales category was again appliances, which jumped 12.5% and now account for 12% of total U.S. sales compared to 11% a year ago. That success, plus a similar increase in the services segment, completely offset sluggish demand in the home theater and video gaming niches.

Happy employees, happy customers

Our store turnover remains in the low 30% range compared to 50% five years ago, and our average store general manager has been in his or her role for about six years. In fact, as we enter Q4, more than 92% of our store general managers already have experience leading their stores through a holiday season. -- Barry

Best Buy made some positive strides in its goal to become one of the top U.S. employers by adding new benefits like paid time off and child care options. Executives highlighted a recent announcement loosening the dress code to allow for jeans and comfortable shoes.

These changes are creating a more stable, happier base of employees, which should translate directly into higher customer satisfaction scores over the holidays and beyond.

Leaning on fast fulfillment

About 99% of our customers now live in the zip code where next-day delivery is available, up from 80% last quarter. And if a customer within an area where free next-day delivery isn't available, or they are shopping for an item that isn't eligible for it, they can still get free standard shipping. -- Barry

Like peers Target and Walmart did earlier in the month, Best Buy talked up the incredible consumer response to ultra-fast fulfillment offerings like same-day delivery. That channel helped push e-commerce up to 15.6% of the broader business compared to 13.8% last year.

The retailer's success over the peak holiday shopping season will depend on its ability to use its store base as an efficient fulfillment network. That's why investors cheered news suggesting that Best Buy is up to that challenge.

That strong position gave management confidence to boost their outlook to call for higher sales this year. Non-GAAP operating margin is also projected to keep climbing. It just touched 4.2% of sales this past quarter compared to 3.5% a year ago, and that trend suggests the company might outpace its ambitious goal of crossing 5% by 2025.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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