Smartphone, TV sales propel Best Buy to better-than-expected 1Q profit

Hubert Joly calls it his "surfing strategy."

While the consumer electronics industry is in a lull, Best Buy Co. Inc. has managed to avoid pitfalls by homing in on the hot spots where the surf is still up.

"We're very focused on catching these waves," Joly, Best Buy's chief executive, said in an interview Thursday after the Richfield-based electronics retailer reported better-than-expected first-quarter results.

These days, Best Buy has been finding those waves in big-screen TVs, appliances, and newer smartphones — in particular, Apple's iPhone 6 and the Samsung Galaxy S6. That helped it ride out a dry spell in tablets and laptops.

"Arguably in the first quarter there was real softness" in the industry, Joly added. "But what was remarkable was how much we were able to make up for that in market share gains."

Investor concerns about sales in consumer electronics pushed Best Buy's stock down about 19 percent in the last two months. Best Buy executives themselves had spoken cautiously about the quarter. But investors sent Best Buy shares up 4 percent Thursday after its quarterly results topped estimates.

Net profit fell 72 percent to $129 million in the three months ended May 3. Best Buy recorded a special charge for restructuring its Canadian stores. It had a one-time tax gain in the year-ago quarter to which its latest performance was compared.

Same-store sales in the U.S. fell 0.7 percent. Adjusted to include the effect of an installment billing process that Best Buy launched for phones in April last year, same-store sales rose 0.6 percent.

David Magee, an analyst with SunTrust Robinson Humphrey, described investors' reaction to Best Buy results as a "relief rally" given the volatility in the industry.

"While the market could stabilize in coming quarters, we continue to be impressed with Best Buy's ongoing strides to improve basic competitiveness," he wrote in a research note. "We think the share gains should continue in the wake of pricing, service and presentation investments."

For the May-to-July period, Best Buy forecast flat to low single-digit percentage growth in sales.

Amid fierce competition from online retailers such as Amazon and big box retailers such as Wal-Mart and Target, Best Buy has been trying to differentiate itself in the marketplace by matching prices, promoting the expertise of employees and building store-in-stores that showcase some brands. It rolled out Samsung and Sony home theater mini-stores to tout pricier, ultrahigh-definition TVs.

Joly said it's still early in the product cycle for the so-called 4K TVs. "But over time, it will happen, as it always does, and then we will focus on the next big thing," he said.

Best Buy has also been working to grow its appliance business, seeing a possible opportunity as Sears and other competitors in that market are struggling. It rolled out Pacific Kitchen & Home mini-stores to more locations which offer a more upscale assortment of appliances.

Joly added that Best Buy has a lower market share in appliances and smartphones, which appear to be growing industrywide, and so has more bandwidth to grow those segments of its business.

Last month, Best Buy announced it would begin accepting Apple Pay in its stores later this year and has already started doing so through its recently updated app. Best Buy is also a member of a retail consortium called the Merchant Customer Exchange that is developing a competing mobile payment, called CurrentC.

On Thursday, Joly said Best Buy plans to continue its membership in the exchange and will accept CurrentC when it becomes available.

Kavita Kumar • 612-673-4113