Investors were expecting some head-turning results from Best Buy's (BBY -0.81%) first quarterly report of 2021. The selling period compares to a depressed prior year that included some of the most intense retailing lockdowns of the pandemic. That comparison gets even easier if you account for booming consumer demand today in several of the household tech and entertainment niches that Best Buy dominates.
Yet the retailer's actual results still surprised many on Wall Street. Let's look at a few key trends that all supported management's significant boost to their 2021 growth outlook.
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Sales are soaring
Investors had been bracing for weaker growth compared to the second half of 2020 when pent-up consumer demand, and a new focus on home entertainment, lifted Best Buy's results. Total sales jumped 13% in Q4, to just under $17 billion.
Growth spiked 37% on that basis in Q1, pushing sales up to $11.6 billion compared to $8.6 billion a year ago. That Q1 result looks just as good when you compare it to the 2019 period, too, which wasn't artificially depressed by retailing lockdowns. Sales back then were $9.1 billion .
Best Buy shot back into record territory thanks to a near ideal selling environment characterized by cash-rich consumers who have rarely been this enthusiastic to shop. "This demand is being driven by continued focus on the home," CEO Corie Barry said in a press release, "which encompasses many aspects of our lives including working, learning, cooking, entertaining, redecorating and remodeling." Best Buy logged a 38% growth spike in the core U.S. market, compared to Target's recent 23% boost .
Profitability is up
Profit margins jumped, too, but Best Buy still trails Target on this key metric. The chain notched a modest gross profit margin uptick as it relied less on promotions. Yet rising costs in areas like fulfillment and labor limited the earnings benefit. Operating margin rose to 6.6% of sales compared to 4.6% two years ago, before COVID-19 scrambled demand trends. Target's comparable metric is approaching 10% of sales.
Still, Best Buy is on better financial footing than executives had forecast just three months ago. "The year has clearly started out much stronger than we originally expected," CFO Matt Bilunas said.
The new outlook
That shift will persist into the second quarter, management believes, and so sales are now expected to rise by between 3% and 6% overall rather than the 1% uptick they initially forecast. That growth assumes a 17% increase in Q2.
Comparisons will get harder from there as reopenings accelerate in the second half of the year. Best Buy is also concerned that consumers might pull back on home tech purchases as they scale back up commitments in areas like travel and dining out.
As a result, the retail company's updated fiscal year outlook assumes no change in their assumptions for more modest growth in the second half of the year. That's a prudent prediction to make today, given all the uncertainty around consumer shopping behavior coming out of the pandemic. But it also leaves Best Buy plenty of room to beat its outlook if people continue splurging on things like appliances, home theaters, and computers.
