Best Buy Q3 Earnings: Cost Cuts Help Expand Profits As Weak Industry Sales Weigh On Top Line

Best Buy (NYSE:BBY) reported its earnings for the third quarter ended October on November 19th.  ((Best Buy News Release)) The consumer electronics retailer reported an earnings per share of $0.37, exceeding a consensus estimate of $0.35. ^[1] Given weak demand, the company did a commendable job of growing same-store sales by a tepid 0.5% with continued strength in the appliances category, driven by investments in stores-within-a-store format. There was some improvement on the margins front too, as the company’s Renew Blue initiative reduced costs significantly.

However, the market for consumer electronics and mobile phones, which makes up for more than two-thirds of Best Buy’s top line, continued to contract during the period and raised some concerns around the coming holiday shopping season. While these headwinds will continue to negatively impact revenues in the short-term, Best Buy remains well positioned to tap into emerging categories such as connected devices and the Internet of Things in the long-term.

Below, we take a closer look at some of the trends observed during Q3 that impacted Best Buy’s earnings. We are in the process of updating our model per the earnings release.

See our full analysis for Best Buy

Growth In Appliances Remains Strong Driven By Investments

During the quarter, conditions in the consumer electronics market presented a tough operating environment. Considering that industry sales of consumer electronics declined by 4.3%, the company did rather well as its comparable sales increased 3.0% year-on-year in the category. It could not replicate the same in the computing and mobile phones space, where comparable sales fell 1.5%. The star, however, continued to be the appliances category which grew at double-digit rates, driven by Best Buy’s investments in expanding stores-within-a-store.

So far this year, Best Buy rolled out 59 Pacific Kitchen & Home stores-within-a-stores, taking the total to 176. It also expanded the number of dedicated experience centers for Samsung’s line of home appliances, named “Samsung Open House”, to 225. As a whole, 1,100 stores-within-a-store were added on top of the 3,700 stores that were present a year ago ^[2].

Not only do these store formats improve Best Buy’s revenue generated per square foot, but also improve in-store experience for customers that draws them to the stores in the first place. These expansions are expected to continue going forward and will be partially funded by savings generated from the company’s cost cutting initiative.

Renew Blue Program Helps Expand Margins

Despite pressures due to investments in services pricing and higher distribution costs associated with the online channel, Best Buy has been able to expand both gross and operating margins. In Q3, gross margin was reported at 23.9%, 90 basis points higher than that in the year ago period. Also, operating margin was higher by 30 basis points at 2.6%.

These improvements were primarily driven by progress made on Best Buy’s known-for Renew Blue initiative. Earlier this year, the company had announced a cost reduction and gross profit optimization program that would generate cost savings of $400 million over three years. So far, about $110 million in costs have been eliminated, which helped offset the investments made in growth initiatives.

Going forward, however, the company has guided for lower margins in the fourth quarter considering increased investments in its stores as well as price competition arising from weak industry demand. Our forecasts already account for this margin pressure as we have modeled for gross margin in the U.S. to decline to about 18% by the end of our forecast period.

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1. Best Buy Earnings Surprise, Nasdaq [↩]
2. Best Buy Q3 Earnings Call Transcript, Seeking Alpha [↩]