Best Buy Co. on Tuesday celebrated its biggest quarterly sales jump in seven years — and then its stock plummeted.
Such is the up-and-down life of retailers these days trying to prove themselves to investors amid the formidable shadow of Amazon.
The Richfield-based retailer posted a giant 5.4 percent jump in comparable sales in the May-to-July period, a performance that outshined many other retailers. However, CEO Hubert Joly cautioned analysts not to expect such a big leaps to be "a new normal."
That admission — along with stepped-up investments in e-commerce and supply chain and concerns about a slowing down of Best Buy's profit growth — spooked investors. The company's stock, which closed just below its record high the day before, fell nearly 12 percent on Tuesday to $55.02.
Matt Sargent, senior vice president of retail for consulting firm Magid, said Best Buy executives were trying to temper excitement since its sales in the first half of the year tend to be mostly from tech enthusiasts. The second half of the year, dominated by gift givers, is when other retailers become more promotional and Amazon becomes an especially appealing option.
"This shouldn't be a surprise to anyone, but I think traders and the market are so jittery about Amazon that they're overreacting," he said.
He added that while other retailers such as Walmart and Target are still figuring out their Amazon strategy, Best Buy has become seasoned at competing with the online juggernaut.
"They're one the best battle-tested retailers out there in terms of this Amazon challenge," Sargent said.
During a conference call with analysts, Joly said that as part of Best Buy's new strategic road map, the retailer is more focused on growing overall revenue rather than profit margin rates. He added that the company will use an additional $600 million in cost cuts over the next few years to help fuel investments as it tries to further differentiate itself and widen the gap with competitors. The company said Tuesday it now plans to spend $700 million in investments this year, up from its initial plan of $650 million.
"We have an opportunity-rich environment. We have momentum," he said. "This is the time to play to win and invest."
Amazon's advantage
Investors often reward Amazon for making much bigger bets and investments at the expense of profits. But it's often the opposite when it comes to the rest of retail, said Charlie O'Shea, a Moody's analyst.
"One of the big advantages Amazon has is that it has the most patient shareholders in retail," he said. "That makes a retail CEO job really difficult in this environment."
For his part, Joly took Tuesday's stock drop in stride, noting that the retailer's stock is often erratic after it reports quarterly results.
"After five years of doing this at Best Buy, predicting what the share price does on the day of earnings is incredibly difficult," he told reporters. "What we focus on is driving performance over time."
By that measure, he noted that Best Buy's stock price has risen in the past year from about $35 to the range of $55 to $60.
On Tuesday, the electronics retailer also raised its sales and profit guidance for the second half of its fiscal year, as the expected launches of a new iPhone and Samsung Galaxy Note are expected to help drive sales in coming months.
One of the investments Best Buy is making is an in-home adviser program it has been testing in five markets. An extension of its Geek Squad, the service sends specially trained and higher-paid employees to customers' homes for free consultations on what products and services they could utilize in their home. This includes items for a kitchen remodeling, setting up a streaming music system throughout the house or upgrading a home theater experience. Best Buy said on Tuesday that it will roll out the service to all major U.S. cities next month.
Army of consultants
Joly said it's not yet clear how big this army of in-home consultants may one day be, but it could grow to anywhere from 250 to more than 1,000 employees strong. He added that the service has brought incremental sales to Best Buy and has led to higher conversion rates and order sizes than in stores.
At the same time, Amazon has begun testing and building out its own network of installation services and in-home consultants, leading some investors to worry that it could rival the Geek Squad.
But O'Shea said Amazon has a long way to go to match Best Buy's capabilities.
"There are 20,000 Geek Squad employees and a whole store base backing them up," he said. "Without the store backup, how are you going to do it?"
In its second quarter, Best Buy's revenue rose 5 percent to $8.9 billion. Online sales rose 31 percent.
Best Buy said the growth came from a variety of categories including computing, wearables, smart home, mobile phones and appliances. While executives said it's hard to quantify how much, they believe they also picked up some sales from store closures by competitors such as HHGregg.
Bucking the trend
Best Buy earned $209 million in the quarter, up 6 percent from $198 million in the same quarter a year ago. Its adjusted profit amounted to 69 cents per share in the quarter, which was better than the 63 cents analysts had forecast.
Best Buy's stock has been trading at or near record highs in recent months as it has managed to continue to show growth at a time when other traditional retailers are showing more strains from the shift to online shopping.
Earlier this year, Joly declared Best Buy's turnaround phase to be officially over and unveiled a new strategic plan called Best Buy 2020. Executives will lay out more details of the new road map at an investors meeting next month at its Richfield headquarters.
Kavita Kumar • 612-673-4113
