With government sales data and other retailers noting weakness in consumer electronics sales trends in recent months, it’s not a surprise that Best Buy saw visits and sales decelerate this quarter (U.S. comparable store sales declined 8.5% Y/Y and U.S. online sales decreased 14.9% Y/Y. Nevertheless, two things stood out to us from the quarter: (1) the shift to higher AUR helping to offset inflationary pressures; and (2) encouraging trends from new retail formats.
- Higher AUR insulating Best Buy from inflation: Like other retailers, Best Buy has experienced cost inflation in areas such as labor, marketing and supply chain. However, unlike other retailers, the cost inflation was largely in-line with the company’s expectations, with Best Buy benefitting from planning and execution over the previous two years. Best Buy has seen an increase in AUR the past two years due to customers gravitating to premium products at higher price points (including appliances, which have become a larger part of the sales mix), lower promotional and markdown activity due to product shortages, and vendors absorbing higher transportation and component costs. Management noted that it is starting to see a pickup in the promotional environment, which is expected to create margin pressure for the remainder of the year.
- Promising results from Best Buy’s experiential format. Over the past several years, Best Buy has taken steps to optimize its store base, including closing several locations (the retailer had 977 domestic stores across all banners as of the most recent quarter, down from its peak of 1,500 domestic units a decade ago), allocating more square footage at smaller format stores (around 15,000 square feet) for fulfillment, and converting legacy stores into experiential formats (which offers a greater number experiential store-in-store partnerships with brands like Samsung, Oculus, and Lego in addition to existing partnerships with Apple, Microsoft, and Amazon), The company plans to remodel roughly 45 stores with its experiential layout this year and has set a target of 300 experiential remodels by 2024.
- We analyzed visitation data for the retailer’s experiential store in Charlotte-North Lake, where remodeling activity was completed in November 2021. We found that Y/Y foot traffic at this location has outperformed Best Buy’s other locations in North Carolina three of the past four months (below). Visitor frequency (visits per visitor) over this period are up slightly compared to the year ago period, and perhaps most interestingly, we found that that trade area for this particular store has a higher percentage of 18–37-year-old millennial consumers than prior to its remodel (30.5% versus 26.6%).
- Outlet stores attract new customers. In addition to Best Buy’s experiential stores, the company has also opened 16 outlet stores, which the retailer plans to use as hubs for its new services and repair hub-and-spoke model. According to management, these locations are "open box, clearance, end-of-life and otherwise distressed large-product inventory in major appliances and televisions that might otherwise be liquidated at significantly lower recovery rates" and that it sees "twice the recovery rate of our cost of goods sold…at our outlets versus alternative channels." From a customer acquisition standpoint, these locations can attract new and re-engaged customers, with management estimating that approximately 16% of outlet customers were new to Best Buy and 37% were re-engaged Best Buy customers. Placer data corroborates that outlet stores are attracting new customers, as we examined side-by-side Best Buy and Best Buy Outlet stores in Burbank, IL and found that almost 30% of the Best Buy Outlet customers had not visited the adjacent Best Buy location over the past 12 months (below). In fiscal 2023 (calendar 2022), Best Buy plans to open 15 additional outlet stores (including new locations in Chicago, Phoenix, and Houston), and plans to expand its assortment at these locations beyond major appliances and large TVs to include computing, gaming and mobile phones.
