Why I Was Wrong About Best Buy

By Markets Fool.com

Image source: Best Buy.

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I've written recently about my doubts that Best Buy's strategy to grow online sales would work. But the retail giant proved me wrong in its latest quarter. Domestic Internet sales grew 24% compared to the year-ago period.

Last fiscal year, Best Buy launched new initiatives to drive traffic to its online store and grow sales through that channel.The new apps,features, and sales perksthat were launched include:

  • Blue Assist: Users of the mobile app can now shake their device or push a button to get live help via chat about potential purchases.
  • Touch ID login:iPhone and iPad users can login to their Best Buy accounts using their fingerprint.
  • Geek Squad app:The new and improved application allows customers to schedule an appointment and check the status of a repair.
  • Same-day delivery: This pilot program was launched in 13 cities and allows for same-day delivery of online orders of products that are available in-store.

I suggested these initiatives were not enough to drive growth, and that the company's online sales would continue to lag retailers such asAmazon . Many of these initiatives are late to the party and are already offered by competitors, such as same-day delivery. I also didn't believe the new apps and features would generate new interest in Best Buy, but rather would just make the purchasing experience simpler for existing customers.

Why I'm eating crow

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Best Buy has not only kept pace with the shift to online sales, but it's been slightly outpacing its largest rival, Amazon. The new store apps and features have been helping close more sales for the company on its digital channels. Here's how Best Buy has fared compared with online retail leader Amazon over the last couple of years:

Comparable Period

Best Buy YOY Online Sales Growth

Amazon YOY Online Sales Growth

Full-year 2014

16.7%

15.1%

Full-year 2015

13.5%

13.1%

Q1 2016

23.9%

20.5%

Data source: Best Buy and Amazon quarterly earnings reports. YOY = year over year.

During the first quarter of this year, CFO Sharon McCollam said the increase was driven by an uptick in online traffic and a higher online sales conversion rate. U.S. online sales were $832 million, representing about 10.5% of total revenue. It was a large step forward for Best Buy after the disappointing online sales growth reported this time last year. Despite being wrong, though, I still feel there are problems with Best Buy's e-commerce strategy.

Why I'm still not buying

While Best Buy has posted strong online expansion, revenue from that division is still small. That $832 million in revenue figure from the first quarter pales in comparison to the $20.6 billion in online sales Amazon posted.

This is an issue because the law of small numbers would apply to Best Buy's e-commerce business, given that it's a fraction of the size of Amazon's. A smaller business would thus be expected to outpace growth of a larger rival. That hasn't been the case, though, as Best Buy only slightly beat Amazon in online sales growth inthe last two years.

This means Best Buy isn't catching up fast enough, nor is it really growing its overall business. Rather, the company is keeping pace with the general trend of retail sales shifting from in-store purchases to online. 2014 and 2015 saw online retail sales in the United Statesincrease about 14% each year.By this measure, Best Buy is benefiting from a general trend in consumer spending more than anything else since it is barely outpacing the general shift.

Image source: Best Buy.

This was borne out in the rest of the company's earnings report. While Best Buy's online sales increased by 24%, the growth was more than offset by sales declines in its store. Total revenue for the quarter was actually down 1.3% from the previous year. Best Buy's ability to grow internet traffic is legitimate, but that still isn't enough to pull its business out of stagnation since the bulk of revenue still relies on physical store foot traffic.

Best Buy's management doesn't expect this to change anytime soon. CEO Hubert Joly reaffirmed guidance of flat revenue for this year compared to last year. During the earnings call, Joly stated that company management sees 2016 "as a year of exploration and experimentation around creating compelling customer experiences that have the potential to unlock growth." The company is still searching for that key ingredient to recapture an expanding rather than a stagnating business. Until that search is over, I'm staying away from Best Buy stock.

The article Why I Was Wrong About Best Buy originally appeared on Fool.com.

Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.