Best Buy Surges as Retailer Boosts Forecast on Sales Gains

(Bloomberg) -- Best Buy Co. entered the holiday shopping season on a positive note after posting quarterly sales that topped estimates and raising its full-year-outlook, sending the shares higher.

Fueled by demand for appliances, headphones, tablets and services like tech support, comparable-store sales in the U.S. rose 2%, easily beating analysts’ projections. The Minneapolis-based consumer-electronics retailer also boosted its forecast for that key retail metric and for profit this year, as its hometown rival Target Corp. did last week.

The results bode well for Chief Executive Officer Corie Barry as she faces a major test this holiday period. The new CEO has a high bar to clear as Best Buy has performed well during that stretch for the past two years. Despite a warning in August about “general uncertainty” in demand for its products, as well as the threat of looming tariffs, Chief Financial Officer Matt Bilunas cited “improved expectations” for the current quarter.

The performance was “very impressive,” Moody’s Investor Service analyst Charlie O’Shea said in a note. “It is more than holding its own against the likes of Walmart, Amazon and Target.”

Best Buy rose as much as 5.8% to $78.54 in New York Tuesday, the biggest intraday gain in more than three months. The shares had gained 40% this year through Monday’s close, compared with the 25% gain in the S&P 500 Index.

Best Buy’s resiliency stems from its ability to take care of the basics -- stocking the right products at competitive prices -- while exploring new areas of opportunity. In this case, the retailer has overcome broader declines in consumer electronics sales by expanding into new areas like services and health care, selling goods ranging from fitness machines to in-home sensor networks for seniors. The health-care push could deliver as much as $46 billion in additional revenue over the next 10 to 20 years, Morgan Stanley estimates.

Best Buy “has successfully pivoted to a strategy that goes beyond just selling ‘stuff’ to one that includes selling services that help consumers,” Neil Saunders, an analyst at GlobalData Retail, said in a note.

Winners, Losers

That agility has positioned Best Buy among the winners in a bifurcating U.S. retail industry. Companies like Target, Walmart Inc. and Costco Wholesale Corp. are taking market share while laggards including J.C. Penney Co., Macy’s Inc. and Kohl’s Corp. are losing out.

Retailers at the head of the pack have also found more ways to get their online orders delivered to fend off Amazon.com Inc. The strategy paid off for Best Buy last quarter, as comparable online sales increased 15%, topping the gain predicted by analysts. The company said Tuesday that it’s starting to offer curbside pickup along with alternate order-pickup locations in CVS drugstores and UPS outlets in New York City.

The quarter wasn’t all good news: Sales of gaming consoles and home theater disappointed once again, and gross margins narrowed slightly. The company said margins will also narrow in the current quarter. Tariffs remain a concern for Best Buy, as it’s among the most exposed retailers to the expanded roster of 15% tariffs on Chinese imports that could hit Dec. 15 if efforts to reach a trade deal fail.

About 60% of Best Buy’s goods come from China, but that could fall to 40% next year as vendors shift manufacturing. The company said Tuesday that its updated forecast includes its best estimate of the tariff impact.

Still, those concerns were more than offset by the boosted full-year forecast. Best Buy now sees companywide comparable sales growth between 1% and 2%, more than its earlier outlook for a gain between 0.7% and 1.7%. Excluding some itens, earnings per share this year will now range between $5.81 and $5.91, well above analysts’ $5.74 estimate.

“The company has definitively emerged as the poster child for how to not just survive -- but thrive -- while competing against Amazon,” Anthony Chukumba, an analyst at Loop Capital Markets, said in a note.

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Lisa Wolfson

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