Why Has Best Buy’s Share Price Tanked By Nearly 30% Over This Year?
Best Buy’s (NYSE: BBY) revenue and earnings per share came in ahead of market expectations so far this year. In the first nine months of fiscal 2019, the company’s revenue grew 5% year-over-year (y-o-y) to around $28 billion, largely due to an enterprise comparable sales increase of 5.8%. The company benefited from stronger consumer demand across all major categories, particularly the mobile phone, gaming, and wearables categories. The retailer also reported non-GAAP EPS of $2.65 in the quarter, up 30% y-o-y, primarily driven by a lower effective tax rate and higher domestic revenue. However, the company’s stock has declined by nearly 30% over the course of this year, despite strong financial results. This was largely due to the retailer’s aggressive push to keep up with Amazon, which led to shrinking margins, and weak fourth quarter guidance, in addition to a broader market sell-off toward the end of the year.
We have created an interactive dashboard which outlines the reasons for the decline in Best Buy’s stock price. You can modify our forecasts to see the impact any changes would have on the company’s fourth quarter revenue and earnings.
Margin Contraction Over First Three Fiscal Quarters
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In the first three quarters of fiscal 2019, Best Buy’s selling, general and administrative (SG&A) expenses grew 4% y-o-y, due to increases in growth investments, higher incentive compensation expenses, and higher variable costs due to increased revenue. As a result, the retailer’s operating margin was 3.5%, down 40 basis points, during the same period. The company’s margins also suffered due to increased fulfillment costs resulting from growth in digital sales. Going forward, we expect this margin pressure to continue in Q4 as well – driven by increased investments in the supply chain and higher transportation costs.
Weak Q4 Expectations
For Q4, Best Buy expects its top line to range between $14.4 billion and $14.8 billion, compared to the consensus estimate of $14.7 billion. In addition, the retailer also expects non-GAAP EPS of $2.48 to $2.58, compared to a consensus estimate of $2.57. Further, Best Buy expects to see a flattish gross margin compared to last year, as approximately 25 basis points of supply chain pressure and a $50 million lower profit sharing benefit could be partially offset by slightly better year-over-year merchandise margins in Q4. The company also expects its SG&A expenses to decline in the low-single digits in Q4, due to an extra week last year and lower short-term incentive compensation, partially offset by the impact of GreatCall’s operating expenses. In terms of comparable sales, Best Buy has guided for overall comp sales growth of flat to up 3% in Q4. The company is facing the downside of posting improved comparable sales growth marks over the last two years, as the upcoming quarterly comparisons become tougher to match. We expect the company’s Q4 revenues to decline y-o-y, due to one fewer week compared to the same quarter last year.
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