Can Best Buy Keep Beating Expectations In Q3?

by Trefis Team
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Best Buy (NYSE: BBY) is scheduled to announce its fiscal third quarter results on Tuesday, November 20. The company has had a better-than-expected fiscal year so far, as both its earnings and revenues came in ahead of market expectations for the first half. In the first six months of fiscal 2019, Best Buy’s revenue grew 6% year-over-year (y-o-y) to around $18.5 billion, largely due to an enterprise comparable sales increase of 6.6%. The company benefited from stronger consumer demand across major categories, particularly the appliances, computer, and mobile phone categories. The retailer’s online sales grew 11% on a comparable basis to $2.3 billion, primarily due to higher conversion and increased traffic. Best Buy also reported non-GAAP EPS of $1.72 in the period, up 34% y-o-y, primarily driven by a lower effective tax rate and a higher domestic revenue.

Our $76 price estimate for Best Buy’s stock is around 15% ahead of the current market price. We have created an interactive dashboard What To Expect From Best Buy’s Q3 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.

Q3 Expectations

In Q2, Best Buy’s gross margin was 23.8%, down 30 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 3% 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 Q3 as well – driven by increased investments in the supply chain and higher transportation costs. The company also expects operating margins to decline in the third quarter as investments will ramp up, including those backing the national rollout of a tech support platform. The retailer’s aggressive push to keep up with Amazon is leading to shrinking margins.

In Q3, Best Buy expects its sales to benefit from the positive category momentum of the first half of 2019. Best Buy expects its top line to range between $9.4 billion and $9.5 billion, compared to the consensus estimate of $9.49 billion. The retailer also expects non-GAAP EPS of $0.79 to $0.84, compared to a consensus estimate of $0.91. However, Best Buy has guided for a 2.5% to 3.5% comparable sales increase in Q3, which would be the slowest pace in the last six quarters. However, this relative slowdown is largely a consequence of tougher year-on-year comparisons, as the company has registered strong growth in recent years. 

Fiscal 2019 Outlook

For full-year fiscal 2019, Best Buy raised its revenue outlook to range between $42.3 billion to $42.7 billion, compared to the previous guidance of $41 to $42 billion. The retailer is now calling for same-store sales to climb as much as 4.5%, compared with a prior target of flat to 2% growth. In addition, the company also raised its profit outlook to range between $4.95 and $5.10, compared with a prior range of $4.80 to $5.00 a share. 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 $40 million of lower profit share revenue, will be partially offset by a combination of returns from new initiatives and ongoing cost reductions and efficiencies. To add to that, the company also expects the Best Buy mobile store closures that were announced in Q4 fiscal 2018 to negatively impact full-year revenue by approximately $225 million, with a flat to slightly positive impact on its operating income.

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