Why Best Buy’s new membership program is ‘front and center’ this holiday season

Piper Sandler senior research analyst Peter Keith joins Yahoo Finance to discuss the benefits behind Best Buy’s newest loyalty membership program and how this program could drive up consumer traffic within stores this upcoming holiday season.

Video transcript

BRIAN CHEUNG: Welcome back to Yahoo Finance. Our call of the day might be thematic to what Birdman and Lil Wayne once said, which is it's all about loyalty. And Best Buy has got a new membership program called Best Buy Total Tech. It involves unlimited Geek Squad technical support, exclusive member pricing, free shipping, delivery, and standard installation.

So for more on this, let's bring in Peter Keith, senior research analyst at Piper Sandler. And Peter, you're saying that this $199 a year program is one of the most intriguing initiatives launched in over five years for the traditional big box retailers. So I guess walk us through your explanation for the possible 3% comp lift that you can see from this new offering.

PETER KEITH: Sure, yeah. So I've covered Best Buy for about 15 years. I'd say in the last five or six years, they've tried to roll out various initiatives to drive this relationship with the consumer, drive loyalty. They had more of a slimmed down membership program called Total Tech Support for the last three years. This is where you would get the sort of unlimited Geek Squad support for $200 a year. Now, with the evolution to what they just call Best Buy Total Tech, it's the same $200 price per year, but now you're getting an extreme number of benefits on top of it, including two-year warranty protection on everything, pricing discounts, free delivery, installation, concierge service.

And when you think about that Total Tech Support, that slimmed-down version, that got to 3 million members in three years. More than doubling the benefits here, we think they very quickly get to about 6 million members with Total Tech. And then ultimately, that's going to drive some repeat and incremental purchase behavior. And that's where it really gets exciting.

JULIE HYMAN: Yeah, and gets exciting in terms of the numbers, Peter, as you lay out in your note. You say that, in 2022, 2023, you could see a 3% lift to comps and a 5% to 8% increase for earnings per share as a direct result of this program. The first step is signing people up for the thing. I've got to be honest, I hadn't heard of it. I know it was in beta, and now they're rolling it out more broadly. Do you think they have sort of sufficient marketing push behind this thing? How are they going to let people know about it?

PETER KEITH: Yeah, so I think it's going to come flying out of the gate. It actually doesn't officially roll out until October. So you would not have really heard about it, unless you're a Total Tech Support member. Then you've been alerted that your membership is going to convert over into Total Tech. They have guided for advertising dollars in Q3 to be up year-on-year and experience some deleverage. That's because they're going to lean into Total Tech with national advertising upon launch. So you're going to see that in about a month.

Secondly, as we go into the holiday season, which is their peak traffic period, obviously, you're going to start to see membership discounts on various items. So you get your regular price, then you get your member price. Maybe it's 10% off, maybe it's 20% off. So that's going to be front and center with the consumer over the holiday period. So we think that advertising and the member pricing is going to be very intriguing for consumers just over the next couple of months.

BRIAN SOZZI: Brian, I liked the charts you had in the bottom of your-- of the note this morning looking at the valuation on Best Buy. I mean, you note that Best Buy shares are trading at a trough P/E ratio. Frankly, I don't understand why. This company has been blowing out of the water on sales and profits for at least the past quarters. It's yielding 3%. Why do you think the stock is trading at these levels?

PETER KEITH: Yeah, you know, you nailed it. There's-- you really have to compliment the company and the management team here. Really, all they do is beat and raise. They just raised the back half of the year sales guidance against very tough compares. They're pretty much the only company I know that's doing that right now.

The reality is that some investors believe that there's been some enormous pull-forward of demand with consumer electronics during COVID, during the pandemic. We don't subscribe to that belief at all. We think, you know, housing, as much as it's a driver to furniture and home improvement, housing turnover is a great driver to consumer electronics as people that equip their new homes. And plus, just the whole work from home dynamic, entertain from home dynamic, it's really just almost an unlimited number of options you can buy with CE product. So we think the market's underestimating the strength of consumer electronics in the next year or two.

JULIE HYMAN: So let's say a lot of people still want to buy this stuff. I admit I'm probably one of those people. Is Best Buy going to be able to get it? You know, we keep hearing about all these supply chain issues. Is Best Buy going to be able to continue to supply that demand? That's part one of my question. Part two of the question is, especially with this sort of high-touch service plan, are they going to be able to get the qualified people in the door to be able to do that service?

PETER KEITH: Sure. Yeah, so look, supply chains are impacting all types of companies right now. And no surprise, a lot of the product that Best Buy sells does come from Asia. I think what we have to remember is Best Buy is number one in this sector with a bullet. I mean, they have 3, 4X the market share of an Amazon in many key categories. So there's going to be some shortages. Best Buy on their earnings call and in my follow-up call has continued to say we feel comfortable with our inventory positions that we're going to have for the holiday. There's always going to be some spot shortages of various products, but overall, they don't feel like this year is going to be different than in years past.

In terms of the tech support, this is a piece of the story I think is most missed on Best Buy. They've had this Geek Squad tech service aspect to their business for 15 years. It's become a huge competitive advantage that they've nurtured and grown for quite a long period of time. So they've already had Total Tech Support, which is providing that unlimited Geek Squad support. Now your [INAUDIBLE] in Total Tech really is [INAUDIBLE] in the warranties. So I think they're very well staffed with Geek Squad. And it's not going to cause a surge of repairs, it's just going to have more coverage under a more appealing membership offer.

BRIAN CHEUNG: Yeah, and Corie Barry saying in the earnings call in August that this was not supposed to be a standalone margin-driving service offering. It's really about long-term customer value. But we'll see how this play works out for them, and we'll definitely have you on for updates in the future. But Peter Keith, senior research analyst at Piper Sandler, thanks for stopping by this morning.