Best Buy’s Stock Tanks Despite Better-Than-Expected Q2 Results

Best Buy‘s (NYSE:BBY) announced better-than-expected second quarter results, as both its revenue and earnings per share came in ahead of market expectations. Best Buy’s revenue grew 5% year-over-year (y-o-y) to around $ 8.9 billion, primarily due to an enterprise comparable sales increase of 5.4%. This growth was driven by stronger consumer demand across most categories, particularly computing, wearables, mobile, gaming, and tablets. The retailer reported higher-than-expected non-GAAP EPS of $0.69, up 21% y-o-y, primarily driven by a lower than expected non-GAAP effective income tax rate and a higher domestic revenue. The company’s SG&A costs grew 3% y-o-y, due to increases in growth investments, higher incentive compensation expenses, and higher variable costs due to increased revenue. On the e-commerce front, the company’s online revenue was more than $1 billion, translating into 13% of the total domestic revenue, compared to 10.6% in Q2 fiscal 2017. 

Despite reporting the best quarterly comparable sales figure since 2009, Best Buy’s stock slid by over 10% on Tuesday, after some positive pre-market trading. This was largely driven by disappointing margins guidance, as the company’s management warned that the growth in gross margins would moderate in the coming quarters and the competition in the electronics category would increase by the end of the year, and asserted that the mid-single-digit comparable sales growth (5.40%) should not be considered a “new normal”.

Best Buy U.S. Continues To Grow

Best Buy’s domestic segment’s revenue increased 5% y-o-y to $8.3 billion, as the domestic comparable sales grew 5.4%, partially offset by the loss of revenue from 11 large format and 42 Best Buy Mobile stores closed during the past year. From an overall merchandising perspective, comparable sales growth in computing, wearables, smart home, mobile phones, and appliances was partially offset by the declines in tablets. In the international segment, the company’s revenue increased 4% y-o-y to $668 million, driven by comparable sales growth of 4.7%. This positive comparable growth was driven by growth in both Canada and Mexico, partially offset by the negative foreign currency impact.

Rolls Out In-Home Advisor Program

Best Buy is rolling out a new service beginning from September, which will offer free in-home consultations across all major U.S. cities nationwide. In this service, professional sales consultants (with product knowledge) will provide free consultations and will serve as a single point of contact for all technological needs across vendors. In fact, the company also plans to use voice technology from the likes of Amazon‘s (NASDAQ:AMZN) Alexa and Google’s Assistant at its 700 stores. This is in addition to the popular Geek Squad services, which help to install, set up and support the products.

Future Outlook

For the third quarter, Best Buy expects its sales to benefit from the positive category momentum from the first half of the year. As a result, the company expects its total revenue to be in the range of $9.3-$9.4 billion in the third quarter. It also expects domestic comparable sales growth in the range of 4.5% to 5.5%, and adjusted earnings per diluted share of $0.75 to $0.80 for the company.

For the full year fiscal 2018, the company raised its guidance to reflect the better-than-expected first-half results, and now expects revenue growth of approximately 4% compared to the prior outlook of approximately 2.5%. It also expects full year non-GAAP operating income growth of 4% to 9% versus its original outlook of 3.5% to 8.5% growth.

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