Best Buy experiments with store concepts to keep ahead of customer trends

At one of Best Buy's distribution centers, employees will operate a "virtual store" where they do product demonstrations and talk to customers through video and live chats. The customers never walk through the door.

The concept store is the latest prototype the Richfield-based electronics retailer is testing as it tries to stay ahead of consumer trends, building upon a strong showing during the pandemic, including record quarterly revenue announced Tuesday.

Best Buy CEO Corie Barry said the company's current research is vital as the retailer tries to become more "customer-centric, digitally focused and efficient" in the long term.

"We believe this is crucial to thriving in a new and different environment where customers expect to seamlessly interact with physical and digital channels throughout the shopping journey," Barry said during a call with analysts.

An experiential store in Houston has new gaming, headphone and fitness experiences and a much bigger Geek Squad presence. Best Buy is remodeling some Charlotte, N.C., stores to have smaller footprints and handle fulfillment differently, and will create a new outlet concept that would have more types of discount merchandise and serve as a hub for auto technology installations among other functions.

In the Twin Cities, where Best Buy has reduced the shoppable square footage of four stores to provide more space for fulfillment, the company has adjusted the stores based on feedback and added more products in small appliances, printing and accessories.

As Best Buy anticipates changes to continue, it posted second-quarter results that handily beat Wall Street expectations.

Revenue for May, June and July grew almost 21% to $11.8 billion, compared with the same period last year, even with online sales declining from the record-setting pace of last year. Earnings were $734 million, or $2.90 a share, far outpacing the $432 million reported last year when its stores were open only to appointment shopping for nearly half the quarter. Comparable sales grew about 20%.

The results pushed up Best Buy's share more than 8% Tuesday. The stock closed at $121.49 a share, near record highs.

"We have delivered a remarkable first half against a volatile backdrop," Barry said.

Continued demand for technology and strong consumer spending power thanks to government stimulus payments, improving wages and high savings levels helped push the positive quarter, she said.

The company expected that the sales increases would slow as more people resumed spending on activities such as dining out and travel. The transition has been slower than expected.

"Although we are seeing some shift in consumer spending occur, the impact has been less pronounced than we previously anticipated," Chief Financial Officer Matt Bilunas said.

As a result, Best Buy raised its financial outlook for the fiscal year. The company now expects comparable sales to increase 9 to 11% for the year. The outlook had already been bumped to an increase of 3 to 6% after results earlier this year.

The raised outlook comes even as the company anticipates sales for the second half of the year to be flat or down 3% compared with outsized results of last year. Even with growth slowing during the second half, Best Buy anticipates it will record more than $51 billion in revenue, several billion more than last fiscal year, Bilunas said.

Many aspects of the pandemic — such as whether workers return to offices or school stays in-person — are still uncertain. Along with shifting consumer behaviors, the holiday season is hard to predict, but Barry said she remains positive the company will be able to adapt to changes.

"Over the longer term, we are fundamentally in a stronger position than we expected to be in just two years ago," Barry continued.

While Piper Sandler analyst Peter Keith was earlier concerned that supply-chain issues could challenge Best Buy during the holiday season, Best Buy management said the retailer was in a good inventory position.

"It still feels like a pretty healthy holiday season for consumer electronics and for Best Buy," Keith said.

Online sales decreased about 28% compared with last year to nearly $3.5 billion, making up less than one-third of overall revenue but still more than the 16% in the same quarter in 2019. In the second quarter last year, online sales had skyrocketed 242% to $4.85 billion.

While the drop in online sales isn't surprising, it showed that digital growth does have a ceiling, said Neil Saunders, managing director of GlobalData Retail.

"It underscores the falsity of the 'online will accelerate indefinitely' and 'all pandemic online gains will stick' narratives," Saunders said in a note on Best Buy's results.

Last year, Best Buy turned about 35% of its stores into ship-from-store hubs meant to handle an increased amount of online orders, but the company has adjusted to need fewer hubs, with 13 stores that will be ready by the holiday and will handle about a quarter of national ship-from-store orders.

Keith, of Piper Sandler, said Best Buy has done a good job at evolving by testing a number of different things including store formats.

"I give them a ton of credit," Keith said. "I think it's very forward-thinking. They recognize that their business has changed structurally with the amount of business that is going to be done online versus solely at the store and so they need to rethink the store layout. They need to rethink the store labor model."