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How Best Buy Co. Inc. Gained 13.8% in August

By Anders Bylund - Sep 4, 2015 at 7:26AM

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A fantastic second-quarter report sent shares skyrocketing. The secret sauce? Focus on people, not numbers.

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What: Shares of Best Buy (BBY -1.84%) rose 13.8% in August, according to data from S&P Capital IQ. The technology retailer bucked the market's declining trend by posting a strong second-quarter report on Aug. 25, followed by a plethora of analyst upgrades.

So what: For the second quarter, analysts expected Best Buy to post earnings of roughly $0.34 per share on roughly $8.3 billion in top-line sales. Instead, the company presented adjusted earnings of $0.49 per diluted share, culled from revenues of $8.5 billion.

Sales shrank by 4% year over year, but earnings per share rose 11%. Even Best Buy CEO Hubert Joly called these results "better-than-expected."

Now what: The quarter's surprisingly healthy sales rested on large-screen TV sets, major appliances, and mobile phones. These are big-ticket items with respectable profit margins, and exactly the right kind of growth segments if you want to drive higher profits. Tablet sales declined, if you're looking for a downside. Then again, the tablet boom has been fading industrywide for several quarters now. That's hardly Best Buy's fault.

Moreover, Best Buy's online sales increased 17% year over year and now represent 8.6% of the company's overall revenues. Best Buy has adjusted its supply chain to funnel more inventory into the online channel.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

As important and successful as Best Buy's online store has been, management still sees its bricks-and-mortar stores as a significant competitive advantage. In particular, Joly likes the way customers might start their purchasing decisions online or even on Best Buy's mobile apps, but then walk into a local store to get a real-world feel for the actual product. There, "the blue shirts" take over:

"Our associates are such a formidable weapon for us," Joly said in an earnings call with analysts. "Even though we've taken $1 billion of cost out, we've actually increased the amount of customer-facing labor. We've increased the product knowledge, the engagements, and the overall sales proficiency." And the in-store sales have responded to Best Buy's focus on experienced, high-quality staff. This company will not go down in cost-cutting flames, the way Circuit City did.

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