Key Takeaways From Best Buy’s Q4 Earnings

Best Buy (NYSE:BBY) announced mixed fourth quarter results on Wednesday, March 1, as its earnings beat market expectations but revenue missed. The company’s revenue declined 1% year-over-year (y-o-y) to around $13.5 billion, primarily due to an enterprise comparable sales decline of 0.7%. This decline was driven by a lack of product availability as well as considerable weakness in gaming, tablets, wearables and mobile phone sales in the quarter. However, the retailer reported higher-than-expected non-GAAP EPS of $1.95, up 27% compared to $1.53 last year. According to management, this strong bottom line performance was driven by a disciplined promotional strategy, optimization of merchandise margins, expense management, and a lower effective tax rate. ^[1]

From an overall merchandising perspective, Best Buy saw growth in connected home, computing, headphone and home theater sales. On the cost side, Best Buy’s enterprise non-GAAP gross margin increased 90 basis points to 22.5%, due to improved margins in the computing and home theater categories in the U.S. and Canada. In addition, the company’s enterprise level non-GAAP SG&A declined 1.4% y-o-y to $2.1 billion, or 15.8% of revenue, due to lower variable costs, partially offset by slightly higher payroll and advertising costs.

Going forward, Best Buy plans to focus on expanding its brand’s online and multi-channel business, accelerating growth opportunities in Canada and Mexico, and investing in people and systems. The company has also announced a new two-year $3 billion share buyback plan, and continues to target a non-GAAP dividend payout ratio between 35% and 45%.

In the domestic segment, Best Buy’s revenue declined by 1.4% y-o-y to $12.3 billion in the fourth quarter. This was primarily driven by a comparable sales decline of 0.9%, and the loss of revenue from 11 large format and 31 Best Buy mobile stores closed during the past year. However, the company’s sales in categories such as consumer electronics and appliances stood out in the U.S. for the retailer in the quarter. Further, the company managed to grow its domestic online revenue to 18.6% of total domestic revenue in the quarter, versus 15.6% in the prior year. Moreover, its domestic online revenue increased by 17.5% on a comparable basis, primarily due to increased traffic and higher conversion rates.

In the international segment, the company’s revenue increased 2.5% y-o-y to $1.14 billion, driven by comparable sales growth of 0.9%. This positive comparable growth was driven by the company’s business in Mexico and a positive foreign currency impact.

Weak Q1 Guidance

For the first quarter, Best Buy expects its sales to see declines from a lack of product availability. As a result, the company expects its total revenue to be in the range of $8.2-$8.3 billion in the first quarter. It also expects domestic comparable sales growth in the range of -1% to -2% and international comparable sales growth in the range of -1.5% to -2.5%, and adjusted earnings per diluted share of $0.35 to $0.40 for the company. Reuters’ compiled analyst estimates forecast earnings of $0.47 per share and revenue of $8.38 billion for Q1.

Following the earnings release, we have updated our model for Best Buy and increased our price estimate for the company’s stock to $44, which is still slightly below the current market price. This was primarily due to a long-term increase in our gross margin estimates for the company as well as slightly lower capex and SG&A expense forecasts driven by its cost management plans.

Have more questions about Best Buy? Please refer to our complete analysis for Best Buy 

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1. Best Buy’s (BBY) CEO Hubert Joly on Q4 2017 Results – Earnings Call Transcript, Seeking Alpha, Mar 1 2017 [↩]