Best Buy's third-quarter surprise: Sales growth

The nagging question about Best Buy Co. Inc. has been whether it was slowly fading — driving profits by cutting costs but not able to build sales.

On Thursday, the Richfield-based electronics retailer showed it can do both. It reported its first sales lift in nearly two years and a near doubling of profit, shattering analysts' expectations.

And in another surprise, it did so with little help from the most-watched new product of the year: the iPhone 6.

Mobile phones, as well as tablets, actually saw softer sales at Best Buy in the quarter than a year ago, despite the highly anticipated launch of Apple's newest smartphone that set records in its opening weekend and help lead the iPhone maker to a record-breaking quarter last month.

In an interview with the Star Tribune, Best Buy CEO Hubert Joly explained that smartphone sales dried up leading up to the iPhone 6 launch in late September as customers waited for the new gadget. But since the launch, he said availability has been an issue and should continue to be during the holidays.

"We saw good quantities during launch, but it was spotty the remaining of the quarter," Joly said.

Best Buy drove revenue upward through greater sales of televisions — bolstered in part by newer ultrahigh definition TVs — as well as video game software, which has caught up with consoles released last year. Other bright spots were computers and appliances.

"We're a bit back in fashion with the customers," he added. "While we remain very sober and humble, the customers are voting with their feet."

Best Buy's better-than-expected results comes on the heels of other big-name retailers such as Target, Wal-Mart, Home Depot and Lowe's who have also reported strong third-quarter numbers.

Best Buy executives, who in August said they expected holiday same-store sales to be down in the low single digits, said Thursday they are now banking on flat sales instead. They are encouraged by sales trends, but noted that the retail environment continues to be highly promotional. While online sales will likely grow, those sales have lower margins. And they also said there could be some supply chain disruptions due to the West Coast port delays.

But Joly said that installment billing for mobile phones, a more targeted gifting recommendations and a better promotional strategy should help Best Buy in the fourth quarter.

"We believe our transformation is a journey," Joly said. "We're still in the early stages of our transformation."

"We believe the market is beginning to see evidence of [Best Buy's] improved competitiveness," David Magee, an analyst with SunTrust Robinson Humphrey, wrote in a research note.

Since Joly's arrival two years ago, Best Buy has been cutting costs as part of its Renew Blue turnaround strategy. But its quarterly sales continued to slip.

In the latest quarter, sales rose to $9.4 billion from $9.3 billion a year ago, the first jump since the three months that ended in January 2013. Profit rose to $107 million, up from $54 million. Adjusted earnings per share of 32 cents beat analysts' expectations by 7 cents.

Same-store sales grew 2.2 percent, Best Buy's strongest showing in that closely watched measure since 2010, said Ken Perkins, president of Retail Metrics.

"The competition has been diminishing," he said. "RadioShack has been having issues. So their primary competition is really Amazon, Wal-Mart, Target and the big-box players. And Best Buy has a broader selection than them."

"And all of them are caught in this promotional vortex, which doesn't seem to be ending," Perkins said.

Kavita Kumar • 612-673-4113