Yesterday Best Buy reported 4Q FY18 results well above Street estimates. Comparable store sales in the quarter were up 9% (domestic) and 9.9% (international), compared with a 3% Street estimate. US comps were especially strong for entertainment (16.8%) and appliances (20.7%). Entertainment was up 26% year-over-year (likely driven by gaming). Appliance sales were up nearly 30% year-over-year and broke a billion dollars in the quarter for the first time. Overall sales were up 13.4% year-over-year with consumer electronics growing 10.3% and the computer and mobile phone category growing 13.4%.
Domestic online sales were up 21.9% year-over-year and were 20% of total domestic revenue in the quarter. We’ve long talked about online sales but at 20% of total domestic sales, it really starts to restructure the business. With 70% of Americans living within 15 minutes of a Best Buy store, in-store pick-up and same-day delivery are key components of growth moving forward. Best Buy has been expanding their same-day delivery services. They’re also expanding their in-home consultation services to help unlock what they see as latent demand.
Best Buy is also planning to close all of its 250 mobile-focused stores by the end of May 2018. These stores were built to leverage growing mobile phone adoption. Today, nearly every U.S. adult (95%) now owns a cellphone, and 77% own a smartphone. At the same time, these stores were also built to create customer convenience but the new convenience is online.
In a letter to employees, Best Buy chief Hubert Joly noted that “the cost of operations in our Mobile stand-alone stores is higher than in our Big Box stores.” Some 55% of Best Buy’s phone stores are within three miles of one of its big-box stores. The larger stores are better positioned to handle the warehousing of online orders that will either be picked-up in store or delivered same-day.
So where’s Best Buy’s Achilles heel? It’s in services. Service revenue was down 9.3% on a year-over-year basis. As online sales increase as a share of total sales, Best Buy will need to grow higher-margin services in order to sufficiently differentiate themselves.