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Best Buy Busts Out

By Jim Pearce on May 29, 2017

I’ve been pounding the table on retailer Best Buy (BBY) for the past two years after I added it to the Personal Finance Growth Portfolio in March of 2015. Since then it has rewarded its shareholders (and our readers) with a 32% gain, nearly twice the increase in the S&P 500 Index.

On May 25 shares of BBY jumped nearly 20% after the company shocked analysts by reporting quarterly earnings 50% above their consensus estimate. It’s rare that a company as closely followed as Best Buy can deliver a financial result so far removed from what “the street” was expecting, but in this case it appears no one outside the company saw it coming.

I can’t honestly say that I was expecting an earnings increase of that magnitude, but I am not surprised by it, either. That’s because Best Buy’s management team has been aggressively pursuing a strategy to defend itself against online e-tailing giant by emphasizing products that consumers prefer to buy in stores.

I have written previously about the obvious candidates for in-store purchases such as home theater furniture, household appliances and other big-ticket items that most consumers prefer to see and touch before plunking down several thousand dollars of their hard-earned cash to have delivered to their homes.

But less obvious is one the more recent contributors to this trend, which is home gaming equipment. I admit to being a bit long in the tooth to having a personal familiarity in that area, so the resident millennial in our office explained it to me thusly: “Before you buy a video game you want to check it out first with your buddies to make sure it’s something you will enjoy playing, so you go to a Best Buy store and play it and then buy it if you like it.”

Video gaming has become a tactile experience, far more advanced than the simple electronic games that I recall from the early gaming days of Pong and Space Invaders. The advent of virtual reality has brought a number of sensory elements into the world of gaming that can only be fully appreciated by testing out the game under the same conditions that you will be playing it.

That’s something that Amazon cannot easily deliver. Sure, you could buy the game and then return it if you don’t like it, but as the father of two millennials I can attest to their lack of patience in going through such a trial and error process to eventually find the right item. Their need for instant gratification is more readily served by jumping in a car and driving to the nearest Best Buy store to check out several games and return home a few hours later with their purchase in hand.

Also helping Best Buy’s quarterly results was the demise of knock-off competitor H.H. Gregg, which declared bankruptcy after failing to beat Best Buy, pardon the pun, at its own game. With Gregg out of the picture, it may be a while before another competitor emerges with the clout to take on Best Buy (my guess is Target may expand its home electronics offerings to fill some of that void).

Both of those factors have been accentuated by the late arrival of tax refunds this year, which the company stated is already boosting second quarter results. Many consumers treat tax refunds as an unexpected windfall, to be spent on some form of personal indulgence as a reward for being a conscientious taxpayer.  While my generation might blow it on a nice dinner at an expensive restaurant, apparently our kids would prefer to use it to buy a video game to keep them entertained long after the simple enjoyment of a meal has passed.

It appears Best Buy knows that and has positioned itself to benefit from this vastly different form of consumer behavior. To be sure, Amazon will figure out a way to cut into this market, but some of the old line retailers can no longer be caught off guard and are prepared to defend their turf. The ones that do will see their stock prices increase considerably, just as Best Buy did last week.

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