What To Expect From Best Buy’s Q2

by Trefis Team
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Best Buy (NYSE:BBY) is scheduled to announce its fiscal second quarter results on Tuesday, August 28. The company announced better-than-expected first quarter results, as both its revenue and earnings per share came in ahead of market expectations. In Q1, Best Buy’s revenue grew 7% year-over-year (y-o-y) to around $9.1 billion, largely due to an enterprise comparable sales increase of 7.1%, which beat expectations easily. The company benefited from stronger consumer demand across all major categories, particularly the appliances, computer and mobile phone categories. The retailer’s online sales grew 12% on a comparable basis to $1.14 billion, primarily due to higher average order values.

Our $74 price estimate for Best Buy’s stock is around 10% below the current market price. We have created an interactive dashboard on what to expect from Best Buy’s fiscal Q2 and fiscal 2019, which outlines our forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Overview of Performance

Best Buy saw its stock grow nearly 60% in 2017, and the company’s stock price has increased around 20% over the course of 2018. Best Buy is executing on its strategy to cut costs, optimize square footage, grow online sales and stabilize its revenue stream. The company returned to real growth in fiscal 2018 (year ending January 2018), with revenue growth of 7% y-o-y to around $42 billion, primarily driven by an enterprise comparable sales increase of nearly 6%. This growth followed almost flattish revenue growth in previous fiscal years. However, the retailer’s aggressive push to keep up with Amazon is leading to shrinking margins. In Q1, Best Buy’s gross margin was 23.3%, down 40 basis points, largely due to increased fulfillment costs resulting from growth in digital sales. On the cost side, selling, general and administrative (SG&A) expenses grew 6% y-o-y, due to increases in growth investments, higher incentive compensation expenses, and higher variable costs due to increased revenue. Going forward, we expect this margin pressure to continue in Q2 as well.

In Q2, Best Buy expects its sales to benefit from the positive category momentum of the first quarter. The company expects domestic comparable sales growth in the range of 3% to 4%, and adjusted earnings per diluted share of $0.77 to $0.82 for the company, which is an increase of 12% to 19% year-on-year. In addition, Best Buy expects its domestic segment to benefit from an extra week in the quarter compared to last year. However, the company’s margin pressure could continue due to increased investments in the supply chain as well as higher transportation costs. Also, the national rollout of Total Tech Support is expected to add approximately 25 basis points of gross profit pressure in Q2.

 Fiscal 2019 Outlook

For full year fiscal 2019, the company continues to expect revenue to range between $41 to $42 billion, with an enterprise comparable sales growth of flat to 2%. The retailer’s investments in specialty labor, supply chain and increased depreciation related to strategic capital investments and ongoing pressures in the business, including approximately $35 million of lower profit share revenue, will be partially offset by a combination of returns from new initiatives and ongoing cost reductions and efficiencies. In addition, the company also expects the Best Buy mobile store closures that were announced in Q4 to negatively impact full-year revenue by approximately $225 million, with flat to slightly positive impact on its operating income.

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