Best Buy CEO Hubert Joly confounds the naysayers

Hobson on retail "bloodbath"

When hospitality executive Hubert Joly was named CEO of Best Buy (BBY) in 2012, the company's shares tumbled 10 percent because investors worried that he lacked the background to turn around the giant consumer-electronics chain. Wedbush Securities analyst Michael Pachter declared on Bloomberg TV: "The guy isn't qualified. I don't know how to say that more clearly."  

Now, the blunt-speaking analyst admitted in an email to CBS MoneyWatch: "I underestimated him."

Pachter wasn't alone.

Shares of the Richfield, Minnesota-based retailer leaped 21.5 percent today, or $10.83, to close at $61.25, after it reported quarterly earnings that far exceeded Wall Street's expectations. That puts the stock price at an all-time high, and the jump made Best Buy the day's top performer among the S&P 500.

Department stores are getting the blues

Net income in the most recent quarter was $188 million, or 60 cents per share, 20 cents higher than analysts' forecasts. Revenue rose 1 percent to $8.53 billion, topping estimates of $8.28 billion, helped by strong performance in video games and mobile phones. Comparable store sales, a key retail metric measuring activity at stores open a year or more, rose 1.6 percent, better than the decline analysts had expected. Online sales soared 22 percent.

"There are earnings beats, and then there are uber earnings beats," said Anthony Chukumba, an analyst with Loop Capital Markets, who rates Best Buy as a "buy." "This was an eye-opening quarter, no question about that."

Other retailers, including Walmart (WMT), Target (TGT) and Home Depot (HD), have reported better-than-expected quarterly results. And off-price shops such as Ross Stores (ROST) that appeal to shoppers interested in the "treasure hunt" for deals are also holding their own against online rivals. But chains that are based in malls, like Macy's (M), continue to struggle and shutter underperforming locations as consumers shift their spending online. 

Boosting Best Buy's results was the popularity of Nintendo's (NTDOY) new Switch gaming system, Samsung's Galaxy Note 8 smartphone and the unlimited data plans that wireless companies sell at Best Buy. 

The chain also is benefiting from Joly's decision back in 2012 to match prices from Amazon (AMZN) and other online rivals. At the time, Joly was trying to combat "showrooming," the practice of consumers going to a brick-and-mortar store to see a product and then buy it online at a lower price.

Why Sears is facing financial troubles

"I remember when he first got there, the talking heads on the CNBCs of the world saying this is the next Circuit City" (which went bankrupt in 2008), said Chukumba. "This isn't even close to the next Circuit City."

For one thing, Best Buy is much better managed and has far greater scale than either Circuit City or HHGregg, another consumer-electronics chain that foundered. Last month it announced that it's going out business after failing to find a buyer.

"HHgregg made some poor decisions over the years," Chukumba said, adding that the chain employed a "commissioned sales force, which consumers were just not comfortable with."

Best Buy is adding new services such as Best Buy Smart Home where in-store experts will help customers select from products such as smart locks, lights and thermostats that will be in 400 stores by the December holidays. It also began selling smart nurseries (including "wireless-enabled monitors, thermometers and a changing pad/scale, plus other innovative essentials," according to the website) in the quarter. And it expanded its test of 24/7 tech support for any device a customer owns regardless of whether it was purchased at the chain.

Best Buy can't afford to rest on its laurels. As Chukumba noted, electronics is a "tough business," with products that "become more and more obsolete by the day." Mindful of these challenges, the retailer announced plans to save $600 million by the end of fiscal 2021. 

Pachter, however, remains skeptical about Best Buy's long-term future, noting that the HHGregg bankruptcy and the struggles at Sears (SHLD) are giving Best Buy's sales a temporary boost. He rates the stock as "underperform."

"That isn't sustainable, and they should return to declining sales again next year," he said. "Yes, they're doing much better on cost controls and share buybacks than I expected, but they're a melting ice cube."