Best Buy continues to outperform even while Samsung recall dents holiday momentum

Best Buy continues to make the most out of choppy waters.

The latest proof?

The company on Thursday reported better-than-expected sales and profits for the third quarter. However, the Richfield-based electronics chain also said it expects a $200 million hit in sales during the holiday season because of various product recalls, most prominently the Samsung Galaxy Note 7.

Investors still cheered, sending Best Buy's shares to the highest level since April 29, 2010. The stock closed at $45.99, up 13.7 percent.

Several years ago, an announcement of that magnitude from a large product recall might have sunk a quarter for Best Buy, said Peter Keith, an analyst for Piper Jaffray. But instead, he said investors were heartened to see Best Buy predict that while sales might be dinged, its holiday profit would be higher than expected.

Under CEO Hubert Joly, Best Buy has faced a lackluster electronics market with various downcycles in products such as tablets, and, earlier this year, in smartphones. And yet, Keith said, the company continues to drive consistent performance and market-share gains."Best Buy has largely powered through it," he said.

The company has done so with a strategy that includes upgrading its website and shipping items faster. The brick-and-mortar stores have been turned into showrooms where customers can learn and experience the latest technology and have employees on hand to provide expertise and advice.

Analysts also were impressed by Best Buy's comparable sales gain of 1.8 percent in the August-to-October quarter, which was better than the company's forecast of a 1 percent increase.

The third-quarter results helped allay some concerns that Best Buy was losing marketshare in 4K TVs, whose prices have been rapidly falling and which are now more widely available.

On a conference call Thursday, Joly told analysts that the lower prices have been driving more overall unit sales, while Best Buy also has benefited from units with other new technological advancements that improve picture quality such as OLED.

Its "blue shirts," he added, are also helping customers also pick up related items such as streaming devices and soundbars as well as arranging delivery and installation through the Geek Squad.

"Our strategy at Best Buy is not just about selling TVs," he said. "It's about helping customers with their entertainment needs. … We've built a capability that's quite unique."

Sales in TVs, as well as in smartphones and connected home products, helped offset declines in the gaming category during Best Buy's third quarter.

In particular, the release of Apple's latest smartphone in September helped. Executives said the demand for the new iPhone 7 was in line with expectations — bigger than for last year's iPhone 6S launch, but not as big as when iPhone 6 came out two years ago.

Mobile sales would have been even stronger had it not been for Samsung's botched launch of the Note 7.

The phone started coming to market in mid-August and recalls started almost immediately because batteries had caught on fire. Samsung decided to recall the last of the Note 7s last month.

Samsung is one of Best Buy's biggest vendors and has branded mini-shops inside its stores.

Best Buy executives said the issue, along with some other product recalls in appliances, had a $60 million impact in the third quarter and will lead to $200 million less in sales than expected in the fourth quarter.

The company now expects comparable sales in the November-to-January quarter to range from down 1 percent to up 1 percent.

Joly said the Samsung recall is a missed opportunity for Best Buy, especially since it had been characterized as "one of the world's most extraordinary phones."

Many customers who would have bought the phone are not switching their interest to the new iPhone, he added.

"What we're seeing is that the customers who would have bought the phone are waiting — many of them are very loyal to the Android world and Samsung," he said, adding that many customers like the larger screen sizes, too.

The Samsung issue will be a drag on its fourth quarter, said Charlie O'Shea, an analyst with Moody's.

"However we believe Best Buy will be able to overcome these and have a strong holiday and overall fourth quarter, driven in large part by continuing online acceleration," he said in a statement.

Best Buy's online sales have now risen 24 percent for three quarters in a row. That helped boost its overall revenue in the third quarter to $8.95 billion.

The company's fiscal third-quarter profit rose 55 percent to $194 million, compared with $125 million in the same period a year ago.

Adjusted for one-time expenses, it earned 62 cents a share, which was higher than both the 47 cents analysts were expecting and the company's forecast that ranged from 43 to 47 cents.

The healthy profit margin was the result of several factors, including customers buying higher-priced items and adding items to their baskets as well as cost-cutting initiatives.

While the sales gains are relatively modest, Hakon Helgesen, an analyst with Conlumino, notes that Best Buy is operating in a tough category without much overall growth.

"In the context of a fairly weak [electronics] market, and intense competition from online players, we believe that the results are respectable and show that Best Buy is finally getting its house in order," he wrote in a note.

Looking toward the holidays, Joly said he expects a mixture of traditional categories such as TVs and computers to be popular as well as more emerging ones such as connected home products, drones and virtual reality devices.

Best Buy has added virtual reality departments to 700 of its stores this fall and already has given 300,000 in-store demonstrations to visitors. In some stores, it's also creating displays that replicate a front door to help customers see how some of the new innovations security technology works.

"If you just see a box on the shelf, it's not terribly helpful to know what you can do," Joly said.

During the holidays, Best Buy will also be beefing up staffing in some of those departments as well as at its online pickup areas, which are especially popular during the last-minute sales rush.

Kavita Kumar • 612-673-4113