Key Takeaways From Best Buy’s Q3

Best Buy‘s (NYSE:BBY) announced mixed third quarter results, as its revenue missed market expectations and its earnings per share came in line. The company’s stock declined 4% after the earnings announcement. In Q3, Best Buy’s revenue grew 4% year-over-year (y-o-y) to around $ 9.3 billion, primarily due to an enterprise comparable sales increase of 4.5%, which fell short of the 5.3% street estimates. The company benefited from stronger consumer demand across most categories, particularly computing, wearables, gaming, and tablets. However, revenues in the mobile category were lower than expected, due to the fact that major new phones did not start selling until November. Also, the company felt the impact of the natural disasters in South Texas, Florida, Puerto Rico and Mexico in this quarter. In Q3, the retailer’s online sales grew 22% y-o-y to $1.1 billion, which is now 13% of its domestic revenue.

The retailer reported non-GAAP EPS of $0.78, up 30% 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 2% y-o-y, due to increases in growth investments, higher incentive compensation expenses, and higher variable costs due to increased revenue.

Best Buy U.S. Continues To Grow

Best Buy’s domestic segment’s revenue increased 4% y-o-y to $8.5 billion, as domestic comparable sales grew 4.5%, partially offset by the loss of revenue from 10 large-format and 44 Best Buy Mobile stores closed during the past year. From a merchandising perspective, the company saw positive comps across almost all its product categories, with the largest drivers being appliances, computing, and smart home. In the international segment, the company’s revenue increased 10% y-o-y to $829 million, driven by comparable sales growth of 3.8%. This positive comparable growth was driven by growth in both Canada and Mexico.

Future Outlook

For the fourth quarter, Best Buy expects its sales to benefit from the positive category momentum from the first nine months of the year. As a result, the company expects its total revenue to be in the range of $14.2-$14.5 billion in the fourth quarter. It also expects domestic comparable sales growth in the range of 1% to 3%, and adjusted earnings per diluted share of $1.89 to $1.99 for the company.

For the full year fiscal 2018, the company raised its guidance, and now expects revenue growth to range between 4% to 4.8% compared to the prior outlook of approximately 4%. It also expects full year non-GAAP operating income growth of 7% to 9.5% versus its original outlook of 4% to 9% growth.

Our $56 price estimate for Best Buy’s stock is about in-line with the current market price.

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