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Did Apple Inc. Just Save Best Buy Co. Inc?

By Leo Sun - Sep 2, 2015 at 7:41AM

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Best Buy’s tighter relationship with Apple is a smart move.

Best Buy (BBY 4.77%) recently posted solid second-quarter earnings that beat analyst estimates on both the top and bottom lines. Let's take a closer look at Best Buy's numbers and how Apple (AAPL 2.45%) fits into Best Buy's long-term growth strategy.

An impressive quarter
Last quarter, Best Buy's revenue rose 0.8% annually to $8.53 billion, beating expectations by $240 million. Comparable-store sales climbed 3.8%, while the consensus estimate was for 1% growth. Non-GAAP earnings rose 17.6% to $174 million, or $0.49 per share, topping expectations by $0.15.

Source: Best Buy.

Best Buy's strong domestic sales, which climbed 3.9% to $7.88 billion, offset a 26% sales decline in its smaller international segment. The company's domestic comparable sales improved 2.7%, fueled by rising sales of home appliances and installment billings related to the strong housing market.

The "Apple effect"
During the conference call, CEO Hubert Joly noted that connected devices, like smart home appliances and wearable devices, would be "positive catalysts in quarters to come." In the wearables segment, the Apple Watch is expected to be a standout performer during the current quarter.

Joly declared that "demand for Apple Watch has been so strong" that Best Buy now plans to sell Apple Watches at all 1,050 of its big-box stores and 30 of its Best Buy Mobile Stores by the end of September. That's a big increase from its original plan to sell the device at 300 locations by this holiday season. That's surprisingly good news for Apple investors, since several analysts recently slashed their full-year estimates for Apple Watch sales.

Source: Apple.

Best Buy will also upgrade Apple's shop-in-shops at 740 locations with new fixtures and display tables for phones, tablets, and computers. The upgrades have already been completed at 350 stores, and another 170 locations will be completed before the holiday season starts. Best Buy will also start selling AppleCare product service and support this quarter, and turn 50 locations into authorized service providers.

How Best Buy stays relevant
Tightening its relationship with Apple helps Best Buy stay relevant against online-only competitors. In the past, Best Buy lost business to online retailers because customers would use its stores as big showrooms for online purchases. The arrival of smartphones and price scanning apps exacerbated that problem.

However, Best Buy noticed how customers flocked to Apple's brick-and-mortar stores despite being able to buy its products online. That's why it started adding Apple shop-in-shops to its big-box stores in 2007. Apple Stores, even tiny shop-in-shops, can have a halo effect on their surroundings by boosting foot traffic.  Real estate research firm Green Street Advisors claims that Apple Stores boost mall sales by about 10%, which gives Apple the ability to negotiate dirt cheap rental fees from mall operators.

Apple isn't Best Buy's only major store-in-store partner. Its top rival, Samsung,also has a considerable presence in its big-box stores. Best Buy showcases Samsung's electronic devices in Samsung Experience Shops in most of its stores, and will launch 225 Samsung Open Houses for its appliances by the end of the year. It also hosts over 600 of Samsung's home theater store-in-stores.

Samsung's Experience Shop at Best Buy. Source: Samsung.

Fresh tactics
Whereas many big-box retailers consider "showroom" to be a dirty word, Best Buy embraced the idea with its store-in-store strategy. But it's also beefing up its online options to compete more effectively against online-only rivals.

Best Buy uses its large network of brick-and-mortar stores as fulfillment centers for online orders, and offers free two-day shipping or in-store pickup from a customer's closest store. It also matches online prices and uses online-only flash sales to keep customers coming back to its website. The company has also enhanced its website with new payment options and the ability to search and shop by brand, and upgraded its recommendation engine. Those efforts helped Best Buy's domestic online revenue rise 17% annually and account for 8% of its top line.

The key takeaway
A few years ago, it looked like Best Buy was doomed. But under Joly, who took over the top spot in 2012 and implemented his "Renew Blue" strategy, the retailer stabilized its business by shrinking its brick-and-mortar presence, expanding its online one, and beefing up its store-in-store strategy to showcase popular brands like Apple and Samsung. These strategies could keep Best Buy surprisingly relevant even as its big-box rivals slowly fade away.

Editor's note: This article has been updated to reflect that the Apple Watch didn't have a material impact on Q2 numbers at Best Buy.

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Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
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