Best Buy closed down stores in the pandemic. But people kept shopping

Best Buy developed a plan. In 48 hours, it raced to convert stores that were designed as sleek blue showrooms to spotlight the latest gadgets and televisions into outposts for shoppers to scoop up their online orders without getting out of their cars. Best Buy's stores also would serve as fulfillment centers to ship online orders to customers' home.

The pandemic has widened the gap between retail's winners and losers. Best Buy is a rare example of a chain that closed down that has managed to succeed.

Some of that has to do with its strategy before the pandemic hit. The company weathered the rise of Amazon (AMZN) and the collapse of electronics retailers such as Circuit City and RadioShack. That's in large part because it beefed up its online appeal with moves such as matching Amazon's prices and offering free next-day delivery on most products.

The question is whether Best Buy can continue its success with the economic recovery on shaky ground. Best Buy said in August that while sales soared over the summer months, the momentum may not continue given the uncertainty over a stimulus bill getting through Congress and the risk of higher unemployment.

Heading into the pandemic, around a quarter of Best Buy's $43 billion in annual sales came from online, a higher percentage than Walmart, Costco and Target.

"They had one of the more advanced [online] platforms in all of retail. That's a byproduct of investments made over the last decade," said Simeon Gutman, analyst at Morgan Stanley.

"Best Buy had to get religion in online."

That has made it easier for the company to adapt quickly to an environment where more people wanted to shop without setting foot in stores. Best Buy this holiday season is experimenting with using 250 stores around the country to ship more online orders. Many of these stores have bigger backrooms than an average supermarket-sized Best Buy store, and the company chose them in part because of their proximity to Best Buy's carrier partners like UPS (UPS) and FedEx (FDX).

Analysts also say the company is selling the right products at a time when shoppers are spending more time indoors. Best Buy has seen a surge in sales of items from laptops to kitchen appliances as people work from home and cook more in their kitchens. Televisions, iPads, XBox and Nintendo set sales have also picked up as consumers entertained themselves at home.

During the six weeks Best Buy closed stores beginning in March, it retained 81% of sales compared with the same six weeks in 2019. Sales in May, June and July increased 5.8% from the same period a year prior, higher than the 2.3% consensus analysts predicted.

So far, Wall Street has rewarded the company for its ability to navigate the pandemic: Best Buy's (BBY) stock has gained around 26% this year, outpacing Walmart (WMT), Target (TGT) and Costco (COST).

On May 4, Best Buy began opening most stores back up to customers, but they had to schedule appointments online if they wanted to come inside.

But the experience was challenging, Barry said, especially for customers. Shoppers would visit newly opened stores, thinking they could walk right in, but Best Buy staffers would have to tell them they needed to make an appointment online first to come inside. In stores, customers had to stay six feet from workers and if a shopper wanted to try a gadget, a Best Buy employee had to wipe it down first.

"I'm not going to say it failed. But it's difficult to retrain your customer expectations, literally overnight," Barry said. "Trying to explain to people digitally how they should expect to interact with you in the store is hard."

Still, customers set up appointments to shop. Analysts attribute this in part to pent-up demand while customers were stuck at home, as well as $1,200 federal stimulus checks and an extra $600 a week the federal government was providing to people who lost their jobs. Those benefits expired at the end of July.

Some customers booked in-store consultations for expensive purchases they had been waiting to make, Barry said, such as home entertainment systems or home offices. Others came in because they knew they would be working from home for longer than initially expected and wanted to upgrade their laptop or buy a better mouse or keyboard. There was also a need for services, after customers waited weeks to fix broken phones or computers with repair shops and Apple stores closed.

Sales accelerated after June 15, when Best Buy fully reopened more than 800 of its stores. The company saw improvement in large appliances and home theater sales, big-ticket items customers buy more frequently in stores, and strong demand in digital health and fitness equipment with gyms closed.

In the last three weeks of August— the latest data Best Buy shared publicly — sales were up around 20% compared with a year ago as parents and kids prepped for at-home schooling.

Reopened stores and stronger sales have allowed Best Buy to bring back two-thirds of the approximately 51,000 employees Best Buy furloughed in mid-April. Best Buy said it is calling the remainder back for seasonal positions.

"There were consumers who had to use technology in ways that they never thought they possibly would have to," said Michael Lasser, analyst at UBS. "We're living in a virtual world, and Best Buy is supplying customers with products that allowed them to live in a virtual world."

However, competition is widening, costs are rising and Best Buy is attempting to expand into new areas that have been hit by the pandemic.

"Best Buy is up against a lot of really strong players," said Lasser. These other chains "can use the consumer electronics sector as a means for bringing traffic into their stores."

Despite a projected rise in consumer electronics' sales this holiday, Best Buy is fighting Amazon, Walmart, Target and Costco for customers. And unlike these rivals, Best Buy doesn't sell food and other household essentials, making it more exposed to a recession.

"Many areas of the consumer electronics retail category are economically sensitive. So if the economy's in a tough spot, that would be a risk for Best Buy," Lasser said.

Best Buy is also getting squeezed by higher costs with the rise in online orders, which are more expensive for retailers than in-store purchases due to shipping costs.

Best Buy's gross profit rate fell 1.2 percentage points to 22.8% during the three months ending August 1, compared with the same period last year.

Online retail sales will grow 18.5% this holiday, the fastest growth since 2008, research firm Forrester predicted in a report last week. Retailers "will feel significant pressure on their margins" this holiday season because "e-commerce logistics costs increase retailers' costs," Forrester said.

The pandemic is pushing Best Buy and other retailers to begin their promotions even earlier than usual this year, which may also pressure profits. "Many of our Black Friday deals directly from our ad are going to be available in October," Barry said.

The growth of online shopping means that Best Buy's stores will need to change. Stores will likely continue to play a greater role in fulfilling delivery and curbside pickup as more of Best Buy's sales shift online and the company works to bring down shipping and labor costs.

"I don't think it's about less stores. I think it's about your stores, perhaps, functioning differently," Barry said.