Best Buy is Doing Even Better Than Last Quarter's Numbers Suggest

This week, electronics retailer Best Buy (BBY) posted solid second quarter numbers against a backdrop of otherwise lackluster retail numbers.  The company reported adjusted earnings of 57 cents per share, up 16% year-over-year and 14 cents better than the 43 cents per share analysts were calling for. It was also the fourteenth consecutive quarterly earnings beat.

Revenue of $8.53 billion was down 1.3% from the year-ago tally, but topped estimates of $8.4 billion. Same-store sales were up 0.8% for the quarter, and online sales jumped 24%.

It was a much needed win for CEO Hubert Joly, as some were beginning to doubt his turnaround place would ever take hold in a meaningful way. Indeed, some say Best Buy's numbers vindicated retailing as a whole after an unimpressive earnings season for many of the big names in the business.

And yet, Best Buy may not have been given enough credit for a great quarter.

It's no mere myth that the Retailing sector (XRT) has been a struggle for a year now. It's been especially ugly for the appliances and electronics segment…. Best Buy's bread and butter. As of July, retail sales of electronics and appliance goods has logged ten straight months of year-over-year declines, with July's setback a fairly typical 3.8%.

Point being, not only did BBY post respectable results for its second fiscal quarter of the year, it did so against a major industry headwind. It makes one wonder what the retailer may be able to do if-and-when the consumer spending tide turns a favorable direction again.

That bullish potential is underscored by something the company mentioned in its comments about the quarter — it's looking for more compelling products to sell, not satisfied with its current offerings.

Virtual reality hardware (and software) is one of those more compelling ambitions. Though VR products are available at some Best Buy stores, it hopes to have a virtual reality presence at 500 stores in time for this year's busy holiday shopping season. The retailer will also be demonstrating the Sony PlayStation VR when it debuts in October. In that virtual reality is expected to be a market worth $150 billion by 2020, that's one of the more compelling products the retailer is seeking.

It's the success in the face of a lethargic market that calls into question analysts' outlook.

Best Buy has been growing the bottom line since 2012, even though revenue has been slumping. That's in large part to Joly's cleanup and streamlining work. The top line has stabilized though. Analysts don't expect it to grow through 2018, but strong VR demand and an even slightly better PC market (and Gartner says they've bottomed out) could set the stage for unexpectedly strong results from this quietly proven player. It's done well since late last year, when other and appliance and electronics retailers couldn't. There has to be a reason.

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