Inflation Catches Up With Best Buy, As It Fends Off Amazon's Challenge

Inflation is catching up with Big-box retailer Best Buy Co. Inc., as it keeps on fending off Amazon's challenge.

This week, the company reported domestic sales of $9.57 billion for Q2, 2022, down 13.1% from last year, due to a 12.7% decline in comparable sales. But the shortfall in sales should be interpreted with caution, as there's much more than inflation at play. Last year's sales were up a whopping 19.6%, on top of solid sales in the previous year, boosted by stimulus dollars.

"We are clearly operating in an uneven sales environment," said Corie Barry, Best Buy CEO, in a statement accompanying the release of Q2 results. "As we entered the year, we expected the consumer electronics industry to be softer than last year following two years of elevated growth driven by unusually strong demand for technology products and services and fueled partly by stimulus dollars. The macro-environment has been more challenged due to several factors and that has put additional pressure on our industry."

Nonetheless, Best Buy's financial results beat analysts' estimates on the top and bottom lines. In addition, the online sales penetration came at 31% of the total domestic sales, almost twice from a couple of years ago, meaning that the company has successfully fended off Amazon's challenge. Meanwhile, the Big-box retailer has regained its competitive edge, as evidenced by a steady rise in the company's Economic Value Added (EVA), the difference between the Return on Invested Capital (ROIC), and the Weighted Average Cost of Capital (WACC). For instance, according to Gurufocus.com calculations, Best Buy's EVA was in the upper teens in the last five years, a significant difference from 2012-14, when it was close to -90%.

Best Buy's strong performance in Q2 is part of a remarkable turnaround the company has been through since Amazon invaded the electronics retailing industry's home turf a decade ago and turned the company's most valuable assets, scale, and location into liabilities. For instance, in what has come to be known as "showrooming," customers would visit Best Buy stores to do window shopping and long on to Amazon's site to do the actual shopping at better prices.

That was bad news for Best Buy. Sales and earnings declined. The company's shares price crashed on Wall Street as investors walked away, with business and equity strategists predicting the Big-box retailer's slow decline and eventual fall.

But it never happened thanks to Renew Blue – an intelligent strategy the company launched six years ago to capitalize on its two substantial advantages, scale and location, to ride a new retail trend, the merging of online and offline retailing. For instance, as has been the case with other brick-and-mortar retailers, Best Buy has been using stores as warehouses and pick-up places to speed up online order delivery.

Then there's the company's expansion of the scope of store operations by offering new products in each store location to ride emerging consumer electronics trends like home theaters and computing, health technology solutions, and assured living.

And there's the introduction of the concept of stores within stores, with electronics giants like Samsung and Microsoft opening up retail outlets in Best Buy stores. It provided the Big-box retailer with a steady source of lease revenue while shifting the cost of showrooming to these companies.

But there's one more element to Best Buy's turnaround strategy, capitalizing on the synergies arising from higher customer traffic and better use of its Geek Squad by bundling product sales and services.

In short, Best Buy's success in dealing with Amazon's challenge, and in seizing new industry trends isn't an accident. It results from a deliberate strategy, which the company is determined to continue, according to its CEO. "Our strategy, and our confidence in it, remains unchanged," he told shareholders in the financial results press release. "We have exciting opportunities ahead of us in a world that is more reliant on technology than ever. We are a financially strong company with a resilient, world class team that will successfully navigate the current environment."