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Best Buy focuses on growth, bets on appliances

Hubert Joly, Chairman and CEO of Best Buy, participates in a panel at the 2015 Fortune Global Forum in San Francisco, California November 2, 2015. REUTERS/Elijah Nouvelage

By Nandita Bose

CHICAGO (Reuters) - Best Buy Co Inc (BBY.N) is betting that appliance sales will drive significant revenue growth in the future, a strategy that is likely to benefit the biggest U.S. electronics chain when it reports earnings on Thursday.

The Minneapolis-based retailer, which operates 1,400 stores in the United States, is focusing on growth again after some analysts feared it was flirting with bankruptcy just a few years ago, hurt by the rise of Amazon.com Inc (AMZN.O). It is now in the third phase of a turnaround plan engineered by Chief Executive Officer Hubert Joly, who took over in August 2012.

"The first phase was 'Don't die,'" Joly told Reuters in a recent interview. "Phase two was improve what we have, and we have clearly done that. Now we are in a position where we look to the future and say, 'How do we grow?'"

Analysts expect third-quarter earnings per share to rise 16 percent to 34.9 cents on sales of $8.83 billion, according to Thomson Reuters I/B/E/S.

Target Corp (TGT.N), Macy's Inc (M.N) and other retailers have indicated consumer caution going into the last quarter of the year, but home improvement chains have bucked the trend, in a potentially positive sign for Best Buy.

Appliances have emerged as one the fastest-growing segments within the company, with 19 quarters of comparable sales growth.

As of the fiscal quarter ended on Aug. 1, appliances contributed 10 percent of Best Buy's domestic revenue. That is up from 4.7 percent in fiscal 2010.

The company raised sales per square foot from $780 in 2010 to $870 in 2014, according to analysts, in part by changing the mix and presentation of appliances.

"It is a growing market and it is a market also where (our) market share has been lower historically ... so there is a significant growth opportunity," Joly said.


Best Buy wants to capture the higher-end segment of the appliance market with products from existing brands including Samsung, LG and Whirlpool, Joly said.

Stumbles by Sears Holdings Inc (SEARS.N), whose Kenmore brand is an appliance titan, are also helping Best Buy gain market share, he said.

Ken Murphy, senior vice president and portfolio manager at Standard Life Investments, which holds Best Buy shares, believes appliances will raise revenue generated per square foot within a store.

Demand for laptops and revenue from services have been under pressure and electronics are not expected to perform strongly, as reflected by Target's disappointing results on Wednesday.

"The only question here is whether growth in appliances can offset the other pieces of their business that are not growing, or growing slowly," said Murphy, referring to Best Buy.

Kevin Balon, senior vice president of appliances at Best Buy, said the recovery of the U.S. housing market is helping.

"People who are coming in now want to make changes to their kitchen, they want to make a planned purchase instead of just coming in to replace something that broke or needs repair."

As part of its turnaround strategy, Best Buy has created stores within stores that focus on certain product categories, including the Pacific Kitchen and Home appliance store, which has been key to improving sales, Balon said.

Best Buy's average selling price in appliances jumps between 10 and 20 percent when it adds an appliance store within an existing store, largely due to a wider assortment of premium products and customers who are willing to spend more.

About 50 percent of customers who walk into a Best Buy appliance section end up making a purchase, compared with 32 percent five years ago.

This is partly due to more dedicated spaces like branded store-in-stores for Samsung, for example.

"It has opened up the possibility of striking similar partnerships with other vendors," Balon said.

(Editing by Peter Henderson and Matthew Lewis)