Like other retailers with large brick-and-mortar store fleets, Best Buy (NYSE:BBY) suffered sharp sales declines in the early days of the COVID-19 pandemic. Indeed, sales sagged 6.3% in the first quarter of the company's 2021 fiscal year.

That said, the shift to working, socializing, and attending school from home has boosted demand for technology products. In recent months, Best Buy has started to capitalize on that demand in a big way, allowing the consumer electronics retail giant to deliver a huge earnings beat this week.

An excellent quarter

Three months ago, Best Buy CFO Matt Bilunas warned investors that sales fell about 5% year over year in the first two weeks of the second fiscal quarter. At the time, Best Buy's stores were open to customers by appointment only. He warned that sales would likely remain under pressure for the full quarter, causing Best Buy's operating margin to decline (as it did in the first quarter).

However, sales trends improved dramatically as the quarter progressed, particularly after Best Buy reopened its stores in mid-June. For the last seven weeks of the period, sales rose about 16% year over year.

As a result, Best Buy's total revenue grew to $9.9 billion from $9.5 billion a year earlier on a 5.8% increase in comparable sales. Notably, domestic online sales more than tripled, growing to 53% of the domestic sales mix from 16% a year ago. That made Q2 the busiest quarter for online sales in Best Buy's history by a wide margin. Customers chose to pick up 41% of those online orders in stores or curbside.

The exterior of a Best Buy store.

Image source: Best Buy.

Impressively, Best Buy managed to generate higher revenue than it did a year ago, even with lower advertising spending and a much smaller active workforce. Total operating expenses declined by about $200 million year over year. This enabled Best Buy to expand its adjusted operating margin to 5.9% from 4% in the prior-year period, driving a 58% surge in adjusted earnings per share to $1.71. While analysts were assuming that Best Buy's earlier guidance was overly pessimistic, the average estimate had called for EPS of $1.08, in line with the company's Q2 profit last year.

Mixed guidance for the third quarter

The sales surge that began in mid-June has continued into August. Sales increased approximately 20% during the first three weeks of the month.

Once again, management is being cautious with respect to guidance, telling investors not to expect the recent pace of sales growth to continue. However, when pressed by analysts to provide further details about this projection, Best Buy executives pointed to general factors like elevated unemployment, federal stimulus efforts losing steam, and the status of the pandemic, along with one specific concern around inventory availability.

This makes it seem like management is again being very conservative with its informal forecast. While Best Buy isn't likely to benefit as much from expense savings this quarter as it did in Q2, strong earnings growth is likely unless the retailer is forced to close its stores again.

Plenty of sales and earnings catalysts ahead

Last quarter, strong sales of computing equipment, tablets, and appliances drove Best Buy's sales growth. By contrast, smartphone sales declined, and gaming sales came in flat due to inventory constraints for gaming consoles.

Yet these weaker categories are primed to rebound in a big way beginning in the fourth quarter and heading into next year. Apple is expected to launch multiple 5G iPhones in October, sparking a big upgrade cycle. Meanwhile, Sony and Microsoft are likely to launch their long-awaited next-generation gaming consoles in November. Supply may be limited in the fourth quarter, but the new console cycle could drive significant growth in gaming sales next year.

Demand for items like computers and tablets may normalize over the next few quarters, now that consumers have had an opportunity to upgrade their equipment for the pandemic. However, with clear catalysts ahead in the mobile and gaming categories, Best Buy has a good chance of sustaining its recent sales momentum for a year or two, if not longer.

Best Buy stock has jumped 70% over the past year and now trades for nearly 18 times its projected EPS for the current fiscal year. But considering the company's strong balance sheet and growing sales momentum, there could still be more upside for investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.